<PAGE> 1
As filed with the Securities and Exchange Commission on July 2, 1998
Registration No. 333-49135
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE
AMENDMENT NO. 2
TO
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
EXCO RESOURCES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-1492779
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5735 Pineland Drive, Suite 235 Douglas H. Miller
Dallas, Texas 75231 Chief Executive Officer
(214) 368-2084 5735 Pineland Drive, Suite 235
(Address, including zip code, and Dallas, Texas 75231
telephone number, including area code, Tel: (214) 368-2084
of Registrant's principal executive offices) Fax: (214) 368-2087
(Name, address, including zip code,
and telephone number, including
area code, of agent for service)
------------------------------
Copy to:
William L. Boeing
Haynes and Boone, LLP
901 Main Street, Suite 3100
Dallas, Texas 75202
Tel: (214) 651-5000
Fax: (214) 651-5940
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [ X ]
If the Registrant elects to deliver its latest annual report to
security holders, or a complete and legal facsimile thereof, pursuant to Item
11(a)(1) of this Form, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===================================================================================================================================
PROPOSED
PROPOSED MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
BE REGISTERED REGISTERED (2) PER SHARE (4) OFFERING PRICE REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
STOCK PURCHASE RIGHTS
FOR COMMON STOCK (1)........ 5,943,360 -- -- -- (5)
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK, $.02 PAR VALUE
PER SHARE TOTAL............. 5,943,360 (3) $6.00 $35,660,160 $10,806 (5)
===================================================================================================================================
</TABLE>
(1) This Registration Statement relates to rights (the "Rights") to purchase
common stock, par value $.02 per share (the "Common Stock"), of EXCO
Resources, Inc. ("EXCO") which will be issued as a dividend to holders of
the Common Stock, and to the shares deliverable upon exercise of the
Rights. This Registration Statement also relates to reoffers and resales
of certain of these Rights by certain holders thereof who may be deemed to
be affiliates of EXCO.
(2) Rights to purchase an additional 854,360 shares of Common Stock and
854,360 additional shares of Common Stock are being registered hereby.
(3) These shares of Common Stock are deliverable upon exercise of the Rights.
This Registration Statement also relates to reoffers and resales of shares
of Common Stock to be purchased by Ares Leveraged Investment Fund,
L.P. and OCM Principal Opportunities Fund, L.P. (the "Standby
Purchasers").
(4) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(g) under the Securities Act of 1933.
(5) Since both the Rights and the shares of Common Stock acquired pursuant to
the exercise of the Rights are being registered for distribution under
this Registration Statement, for purposes of Rule 457 there is no
separate registration fee for the Rights. A filing fee of $9,253 was
paid in connection with the initial filing of this Registration Statement.
--------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION ACTING PURSUANT
TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED JULY 2, 1998.
PROSPECTUS
[EXCO LOGO] 5,943,360 SHARES
COMMON STOCK
------------------------
EXCO Resources, Inc. ("EXCO") is distributing to the holders of its
common stock, par value $.02 per share (the "Common Stock"), transferable rights
(the "Rights") to subscribe for and purchase an aggregate of 5,943,360 shares of
EXCO's Common Stock, for a price of $______ per share (the "Subscription
Price"). Each holder of Common Stock of record as of July __, 1998 is entitled
to receive ten Rights for each share of Common Stock held as of such date. One
Right entitles the holder to purchase one share of Common Stock. Each Right also
carries the right to subscribe at the Subscription Price for shares of Common
Stock that are not otherwise purchased pursuant to the exercise of Rights. The
Rights will be evidenced by transferable certificates (each, a "Subscription
Certificate"). The distribution of the Rights and sale of shares of Common Stock
are referred to herein as the "Rights Offering." There is no minimum number of
shares that must be subscribed for in the Rights Offering for it to be
completed. Ares Management, L.P. on behalf of Ares Leveraged Investment Fund,
L.P. ("Ares") and Oaktree Capital Management, LLC on behalf of OCM Principal
Opportunities Fund, L.P. ("Oaktree") (the "Standby Purchasers") each have
provided a standby commitment (the "Standby Purchase Agreements") to purchase
from EXCO shares of Common Stock not purchased pursuant to the exercise of the
Rights, also at a price of $______ per share. Ares has agreed to purchase from
EXCO a minimum of 1,000,000 shares of Common Stock and a maximum of 2,000,000
shares of Common Stock not purchased pursuant to the exercise of the Rights (the
"Ares Standby Purchase Agreement") The Ares Standby Purchase Agreement would be
exercised immediately following expiration of the Rights Offering provided a
minimum of 3,000,000 shares of Common Stock are purchased pursuant to the Rights
Offering, at least 250,000 shares of which must be purchased by Douglas H.
Miller ("Mr. Miller"). Oaktree has agreed to purchase from EXCO 1,000,000 shares
of Common Stock not purchased pursuant to the exercise of the Rights (the
"Oaktree Standby Purchase Agreement"). The Oaktree Standby Purchase Agreement
would be exercised immediately following expiration of the Rights Offering
provided a minimum of 2,000,000 shares are purchased pursuant to the Rights
Offering, at least 250,000 shares of which must be purchased by Mr. Miller and
provided Ares has purchased at least 1,000,000 shares pursuant to the Ares
Standby Purchase Agreement. See "The Rights Offering."
The Rights Offering, together with the Standby Purchase Agreement, are
intended to fund a pending acquisition transaction, to repay indebtedness of
EXCO and to increase EXCO's working capital. See "Use of Proceeds."
The Rights will expire at 5:00 p.m., Dallas time, on __________, 1998,
unless extended by EXCO (such date and time, as it may be extended, the
"Expiration Date"), and thereafter will be void and of no effect. Shareholders
who do not exercise or sell their Rights prior to the Expiration Date will
relinquish the value inherent in the Rights. Accordingly, shareholders are
strongly urged to exercise or sell their Rights prior to the Expiration Date.
On December 19, 1997, Mr. Miller purchased from certain holders 413,423
shares of outstanding Common Stock at a price of $3.00 per share ($6.00 per
share equivalent after adjusting for the one-for-two reverse stock split (the
"Reverse Stock Split") approved by shareholders on March 31, 1998) for an
aggregate purchase price of approximately $1.24 million. On December 31, 1997,
EXCO sold 100,000 shares of Common Stock each to T.W. Eubank ("Mr. Eubank") and
Earl E. Ellis ("Mr. Ellis") for a cash price of $3.00 per share ($6.00 per share
equivalent after adjusting for the Reverse Stock Split) for aggregate gross
proceeds of $600,000. The net proceeds were used to repay certain outstanding
accounts payable and to provide additional working capital to EXCO. On March 31,
1998, shareholders approved the expansion of membership on EXCO's Board. The
shareholders elected Mr. Miller, Mr. Eubank, J. Douglas Ramsey ("Dr. Ramsey"),
T. Boone Pickens ("Mr. Pickens"), Stephen F. Smith ("Mr. Smith"), Mr. Ellis and
J. Michael Muckleroy ("Mr. Muckleroy") to the Board. See "Recent Developments."
The Prospectus also covers (i) the potential resale of Rights by
certain directors and executive officers of EXCO, including Messrs., Miller,
Eubank and Ellis and (ii) the reoffer and resale of Common Stock by the Standby
Purchasers. See "Selling Shareholders" and
"Plan of Distribution."
The Common Stock is quoted on the OTC Bulletin Board (the "OTC") under
the symbol "EXCO." On June 25, 1998, the last reported sale price of the Common
Stock on the OTC was $6.50 per share as adjusted for the Reverse Stock Split.
It is anticipated that the Rights will trade on the OTC under the symbol "EXCO
RT" until the close of business on the last trading day preceding the
Expiration Date. EXCO has made application to list its Common Stock on the
Nasdaq National Market System following completion of the Rights Offering.
There can be no assurance that such application will be approved.
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
SUBSCRIPTION UNDERWRITING DISCOUNTS PROCEEDS TO
PRICE AND COMMISSION EXCO (1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share of Common Stock........... $______ (2) N/A $______
Total........................... $______ N/A $______
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Before deducting expenses payable by EXCO with respect to the Rights
Offering, estimated at approximately $192,500.
(2) This represents the Subscription Price for purchase of a share of Common
Stock upon exercise of the Rights.
-------------------------
, 1998
<PAGE> 3
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), which can be identified by the use of forward-looking
terminology such as, "may," "believe," "expect," "intend," "anticipate,"
"estimate" or "continue" or the negative thereof or other variations thereon or
comparable terminology. All statements other than statements of historical fact
included in this Prospectus, including without limitation, the statements under
"Prospectus Summary," "Risk Factors," "Pro Forma Combined Condensed Financial
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources," "Business and
Properties -- Business Strategy," "Business and Properties -- Oil and Natural
Gas Reserves" and "Certain Federal Income Tax Considerations -- Tax Consequences
to Holders of Rights" located elsewhere herein regarding EXCO's financial
position and liquidity, the volume or discounted present value of its oil and
natural gas reserves, its ability to service its indebtedness, its strategic
plans including its ability to locate and complete acquisitions of oil and
natural gas assets, and other matters, are forward-looking statements. Although
EXCO believes that the expectations reflected in such forward-looking statements
are reasonable, it can give no assurance that such expectations will prove to
have been correct. Important factors with respect to any such forward-looking
statements, including certain risks and uncertainties that could cause actual
results to differ materially from EXCO's expectations ("Cautionary Statements")
are disclosed in this Prospectus, including, without limitation, in conjunction
with the forward-looking statements included in this Prospectus. Important
factors that could cause actual results to differ materially from those in the
forward-looking statements herein include, but are not limited to, the timing
and extent of changes in commodity prices for oil and natural gas, the need to
develop and replace reserves, environmental risks, drilling and operating risks,
risks related to exploitation and development, uncertainties about the estimates
of reserves, competition, government regulation and the ability of EXCO to meet
its stated business goals. All subsequent written and oral forward-looking
statements attributable to EXCO or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Statements.
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and financial statements (including the notes thereto)
appearing elsewhere in this Prospectus or incorporated by reference in this
Prospectus. Unless the context otherwise requires, the term "EXCO" means EXCO
Resources, Inc. and its subsidiary taken as a whole. Quantities stated as
equivalent oil reserves are based on a factor of six thousand cubic feet of
natural gas per barrel of oil. Except as otherwise indicated herein, each
reference herein to "on a pro forma basis" shall mean that the results for the
stated period or other information has been adjusted to reflect the
consummation of the Maverick County Acquisition, the Jacobi-Johnson
Acquisition, the Dawson County Acquisition and the Merger Agreement (each as
defined herein). Unless otherwise stated herein, all references to shares of
Common Stock, for periods prior to March 31, 1998, do not take into account
EXCO's Reverse Stock Split (as defined herein) approved by shareholders on
March 31, 1998. Certain terms relating to the oil and natural gas business and
used herein are defined in the "Glossary of Selected Oil and Natural Gas Terms"
included elsewhere in this Prospectus.
THE COMPANY
EXCO is an independent oil and natural gas company that has been engaged in
the oil and natural gas business since 1955. EXCO's activities are currently
conducted primarily in Texas and Louisiana. Due to limited capital resources and
cash flow, in recent years EXCO's business activity has decreased. At December
31, 1997, EXCO had 779,150 Boe of proved reserves, 93% of which were natural
gas, and owned leasehold interests in a total of 15,788 gross acres (3,744 net
acres) of oil and natural gas properties, 49% of gross acres (75% net) which
were developed acres. EXCO held interests in 47 gross (9.76 net) wells at
December 31, 1997. On a pro forma basis at December 31, 1997, EXCO had an
interest in 176 gross (50.9 net) wells and had estimated proved reserves of
2,268,100 Boe with an estimated SEC PV-10 of $13.1 million ($12.2 million
Standardized Measure). Approximately 70% of these reserves were classified as
proved developed producing reserves. On a pro forma basis at December 31, 1997,
EXCO's proved reserves had an estimated reserve life of 13.3 years and were 62%
natural gas. EXCO currently serves as operator of 77 wells. See "Business and
Properties -- Oil and Natural Gas Reserves" and "--Acreage."
On December 19, 1997, Mr. Miller acquired 413,423 (approximately 51%) of
EXCO's outstanding shares of Common Stock at $3.00 per share, from various
holders, including certain current and former officers and directors of EXCO.
At that time, three of EXCO's five directors resigned and Mr. Miller and Mr.
Eubank were elected to the Board of Directors. In addition, Mr. Miller was
elected Chairman of the Board and Chief Executive Officer and Mr. Eubank was
elected President, Treasurer and Chief Financial Officer. On December 31, 1997,
Mr. Eubank and Mr. Ellis each acquired from EXCO 100,000 shares of Common Stock
for $3.00 per share. Also, on December 31, 1997, Mr. Eubank resigned as Chief
Financial Officer and Dr. Ramsey was appointed Chief Financial Officer and Vice
President of EXCO. Mr. Miller was formerly Chairman of the Board and Chief
Executive Officer of Coda Energy, Inc. ("Coda"). Mr. Eubank was formerly
President and a director of Coda and Mr. Ellis was formerly a director of Coda.
Dr. Ramsey was formerly Financial Planning Manager of Coda. With the proceeds
of the Rights Offering and the credit facility arranged with NationsBank of
Texas, N.A. (the "Credit Facility"), the new management team has commenced an
aggressive acquisition, development and exploitation program. In executing this
strategy, EXCO will focus on producing properties with enhancement
opportunities from activities such as infill drilling, recompletions, repairs
and equipment changes. EXCO will seek properties it can operate, thus
maintaining the maximum control of enhancement activities.
RECENT AND PENDING ACQUISITIONS
Maverick County Acquisition. On February 11, 1998, EXCO acquired
certain properties from Osborne Oil Company and Gypsy Production Company and
certain other sellers (the "Maverick County Acquisition") in the Chittim/Barclay
Ranch Properties located in Maverick County, Texas (the "Maverick County
Properties"). As of December 31, 1997, the Maverick County Properties were
estimated to contain 415,975 Boe of proved reserves, 98% of which were natural
gas, and owned leasehold interests in a total of 3,744 gross acres (3,123 net
acres) of oil and natural gas properties, 9.6% of gross acres which were
developed acres. The aggregate purchase price for the Maverick County Properties
was $760,200. See "Recent Developments -- Maverick County Acquisition."
2
<PAGE> 5
Jacobi-Johnson Acquisition. On May 8, 1998, EXCO acquired all of the
outstanding common stock (the "Jacobi-Johnson Acquisition") of Jacobi-Johnson
Energy, Inc. ("Jacobi-Johnson"). Jacobi-Johnson owns oil and natural gas working
interests in Polk, Nacogdoches, Navarro, Smith and Wood Counties, Texas
(collectively, the "Jacobi-Johnson Properties"). The Jacobi-Johnson Properties
include 34 gross producing (14.3 net producing) wells with current net
production of approximately 59.4 Bbls of oil and 171,000 cubic feet of natural
gas per day. In addition to the producing wells, the Jacobi-Johnson Properties
include working interests in two saltwater disposal wells. As of December 31,
1997, the Jacobi-Johnson Properties are estimated to contain proved reserves of
234,985 Bbls of oil and 597,880 Mcf of natural gas. Approximately 100% of the
estimated proved reserves of the Jacobi-Johnson Properties are classified as
developed. The aggregate purchase price paid for the stock was $1,476,451,
subject to post-closing adjustments. See "Recent Developments -- Jacobi --
Johnson Acquisition."
Gladstone Merger. EXCO entered into an Agreement and Plan of Merger
(the "Merger Agreement") on May 1, 1998 with Gladstone Resources, Inc.
("Gladstone"). Gladstone is a Dallas, Texas based oil and natural gas
production company with properties located in Kent, Stonewall, Schleicher,
Pecos and Madison Counties, Texas, and San Juan County, New Mexico. Under terms
of the Merger Agreement, Gladstone stockholders will receive approximately $1.4
million, or $.33 per share, in cash. It is currently anticipated that the
transaction will close in the third quarter of 1998, with EXCO being the
surviving corporation. See "Recent Developments -- Gladstone Merger."
3
<PAGE> 6
Dawson County Acquisition. On June 30, 1998, EXCO completed the
acquisition of certain oil and natural gas properties from various working
interest owners, (the "Dawson County Acquisition") located in Dawson and Brazos
Counties, Texas (the "Dawson County Properties"). The Dawson County Properties
include 11 gross (5.3 net) producing wells and 4 gross (1.5 net) saltwater
disposal and non-producing wells which may require recompletions, workovers or
abandonment. The Dawson County Properties include 645 gross (327 net) developed
acres and 627 gross (279 net) undeveloped acres. The purchase price was
approximately $3.5 million cash.
4
<PAGE> 7
CONTROL OF EXCO
Upon purchasing the shares of EXCO's Common Stock on December 19, 1997,
Mr. Miller held approximately 51% of EXCO's outstanding Common Stock. On that
date, three of EXCO's five directors resigned and Mr. Miller was nominated and
appointed to the Board. Also, on December 19, 1997, Mr. Miller nominated Mr.
Eubank to the Board and Mr. Eubank was appointed a director. David N. Fitzgerald
and Charles W. Gleeson, then-existing directors, remained on the Board until
March 31, 1998, when the shareholders of EXCO elected Messrs. Miller, Eubank,
Ramsey, Pickens, Smith, Ellis and Muckleroy.
On December 31, 1997, EXCO sold 100,000 shares of its Common Stock to
each of Messrs. Eubank and Ellis (with each now holding approximately 10% of
EXCO's outstanding Common Stock). Mr. Miller currently holds approximately 41%
of the outstanding Common Stock. Messrs. Ellis, Eubank and Miller intend to
exercise an indeterminate number of their Rights pursuant to the Rights
Offering. Further, Messrs. Ellis, Eubank and Miller may assign an indeterminate
number of their Rights to other buyers, including transferring Rights to the
Standby Purchasers. See "Recent Developments -- Change of Control."
CREDIT FACILITY
On February 11, 1998, EXCO entered into the Credit Facility with
NationsBank of Texas, N.A. The Credit Facility provides for borrowings not to
exceed $50 million, subject to borrowing base limitations.
The Credit Facility consists of a regular revolver, which at June 30,
1998, had a borrowing base of $6.7 million. As of June 30, 1998, approximately
$680,000 was available to be borrowed under the Credit Facility. All borrowings
under the Credit Facility are secured by a first lien deed of trust providing a
security interest in tangible and intangible assets representing at least 90% of
the assessed present value of EXCO's oil and natural gas properties. See
"Description of Credit Facility."
BUSINESS STRATEGY
Following completion of the Rights Offering, EXCO intends to build
itself as a leading independent oil and natural gas exploitation and production
company by implementing the following business strategies:
o Growth. Achieve asset, revenue and cash flow growth as a
result of the acquisition and further development of other
producing oil and natural gas properties. EXCO believes there
are numerous opportunities to acquire additional energy assets
and to enhance the value of such assets through improved
operating practices and by aggressively developing reserve
potential.
o Acquire and Enhance Producing Oil and Natural Gas Properties.
Take advantage of opportunities that currently exist in the
United States to acquire producing oil and natural gas
properties. EXCO plans to continue to focus its acquisition
activities onshore in Texas, New Mexico, Oklahoma and
Louisiana in order to complement its existing properties and
operations; however, EXCO plans to review potential
acquisitions in other regions of the United States if they
represent a significant concentration of energy-related
assets.
5
<PAGE> 8
o Emphasize Exploitation and Development Activities. Exploit its
existing oil and natural gas properties and conduct
development evaluation and drilling on its existing and future
oil and natural gas properties. EXCO intends to concentrate on
enhancement opportunities from activities such as infill
drilling, recompletions, repairs and equipment changes. EXCO
may participate, from time to time, in a limited number of
exploratory wells.
o Corporate Efficiencies. Maximize corporate efficiencies
through the development and operation of a larger asset base
with the potential to limit increases in overhead in the
future.
o Capital Management. Maintain financial strength and
flexibility through effective management of debt and equity.
o Technology. Increase its exploitation efforts, focusing on
established geological trends where EXCO can employ
geological, geophysical and engineering expertise. EXCO is
considering the application of 3-D seismic and advanced
drilling technologies where cost-effective and appropriate.
6
<PAGE> 9
SOURCES AND USES OF FUNDS
The total proceeds (assuming a $6.00 per share Subscription Price for
the purposes of this table) from the Rights Offering are estimated to be
approximately $35,660,160 (assuming all Rights are exercised). The following
table sets forth the proposed sources and uses of funds from the Rights
Offering. See "Use of Proceeds."
<TABLE>
<CAPTION>
Amounts
(in millions)
<S> <C>
Sources
Common Stock............................................................... $
35.7
------
Total............................................................. $
35.7
======
Uses
Gladstone Merger .......................................................... $ 1.4
Repay indebtedness ........................................................ 6.1
Working capital ........................................................... 28.0
Rights Offering expenses .................................................. .2
------
Total ............................................................ $
35.7
======
</TABLE>
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RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in connection with an investment in the Common Stock offered hereby,
including information regarding EXCO's capital structure and continuing losses,
the uncertainty of natural gas and oil prices and certain risks associated with
the Rights Offering.
-----------------------
EXCO maintains its principal executive offices at 5735 Pineland Drive,
Suite 235, Dallas, Texas 75231, and its telephone number is (214) 368-2084.
7
<PAGE> 10
THE RIGHTS OFFERING
The Rights Offering is an integral part of EXCO's growth strategy. The
Rights Offering is intended to recapitalize EXCO through the issuance of up to
approximately $____ million in Common Stock. The net proceeds of the Rights
Offering along with amounts borrowed under the Credit Facility will be used to
fund the expansion and diversification of EXCO's operations through the
acquisition of oil and natural gas producing properties and the further
development and exploitation of those properties. EXCO will issue and sell up to
an aggregate of approximately $____ million of Common Stock to investors who
subscribe to purchase shares of Common Stock in the Rights Offering and through
the exercise of the Standby Purchase Agreements, if necessary. The Rights
Offering will permit holders of rights to purchase shares of Common Stock at
$______ per share. The Subscription Price was determined by the Board of EXCO
and may not reflect the actual or fair value of EXCO or the Common Stock. The
price was determined after considering such factors as the price paid by Messrs.
Miller, Eubank and Ellis for the purchase of their shares in December 1997
after taking into account the Reverse Stock Split, the current trading price for
the Common Stock, future prospects of EXCO,the industry in general and EXCO's
position in the industry, market valuations of the securities of companies
engaged in similar activities, the quality of the management team and
negotiations with the Standby Purchasers. See "The Rights Offering."
EFFECTS OF THE RIGHTS OFFERING
The net proceeds from the Rights Offering will enhance EXCO's ability
to compete in the oil and natural gas industry by providing significant equity
capital to EXCO and improving its ability to attract additional capital. The
Rights Offering will allow EXCO to build its equity capital position which EXCO
believes it can leverage under its Credit Facility and to arrange other debt and
equity offerings. A portion of the net proceeds will be used to repay
outstanding indebtedness incurred under the Credit Facility in connection with
the Maverick County Acquisition, the Jacobi-Johnson Acquisition and the Dawson
County Acquisition. Management believes all of these actions will enhance
EXCO's ability to pursue additional acquisition and development opportunities
and to carry out its business strategy.
8
<PAGE> 11
SUMMARY OF TERMS
Rights.............................. Each holder of Common Stock will receive
ten transferable Rights for each share
of Common Stock held of record by such
holder at the close of business on July
__, 1998 ("the Record Date"). An
aggregate of 5,943,360 Rights will be
distributed pursuant to the Rights
Offering. Each Right will entitle the
holder to purchase one share of Common
Stock. An aggregate of 5,943,360 shares
of Common Stock will be sold assuming
all Rights are ultimately exercised
under the Basic Subscription Privilege,
the Oversubscription Privilege (if
needed) and the Standby Purchase
Agreements (if needed). See "The Rights
Offering -- The Rights."
Basic Subscription Privilege........ Each Right will entitle the holder
thereof to receive, upon payment of the
Subscription Price, one share of Common
Stock (the "Basic Subscription
Privilege"). See "The Rights Offering --
Subscription Privileges -- Basic
Subscription Privilege."
Oversubscription Privilege.......... Each holder of Rights who exercises in
full such holder's Basic Subscription
Privilege may also subscribe at the
Subscription Price for additional Rights
to acquire additional shares of Common
Stock available as a result of
unexercised Rights, if any (the
"Oversubscription Privilege"). In no
event, however, may the holder of Rights
oversubscribe for more than 100% of the
shares purchased by the holder in the
Basic Subscription Privilege. If the
number of shares available, taking into
account the aforementioned restrictions,
are not sufficient to satisfy the
oversubscriptions, the available shares
will be allocated pro rata (subject to
elimination of fractional shares) among
the holders of Rights who exercise the
Oversubscription Privilege, in
proportion, not to the number of shares
requested pursuant to the
Oversubscription Privilege, but to the
number of shares each beneficial holder
has purchased pursuant to the Basic
Subscription Privilege; provided,
however, that if such pro rata
allocation results in any holder being
allocated a greater number of shares
than such holder subscribed for pursuant
to the exercise of such holder's
Oversubscription Privilege, then such
holder will be allocated only such
number of shares as such holder
subscribed for and the remaining shares
will be allocated among all other
holders exercising the Oversubscription
Privilege. See "The Rights Offering--
Subscription Privileges--
Oversubscription Privilege."
Standby Purchase Agreement ......... The Standby Purchasers have agreed to
purchase an additional number of shares
of Common Stock equal to the number of
shares of Common Stock not purchased
pursuant to the exercise of Rights
under the Basic Subscription Privilege
and the Oversubscription Privilege. The
Ares Standby Purchaser Agreement
provides that Ares will purchase a
minimum of 1,000,000 shares and a
maximum of 2,000,000 shares also at a
price of $______ per share, provided a
minimum of 3,000,000 shares of Common
Stock are purchased pursuant to the
Rights Offering by holders other than
the Standby Purchasers and at least
250,000 of such shares are purchased by
Mr. Miller. The Oaktree Standby
Purchase Agreement provides that
Oaktree will purchase 1,000,000 shares
of Common Stock provided a minimum of
2,000,000 shares are purchased pursuant
to the Rights Offering by holders other
than the Standby Purchasers and at least
250,000 of such shares are purchased by
Mr. Miller and provided Ares has
purchased 1,000,000 shares pursuant to
the Ares Standby Purchase Agreement.
In addition, the Standby Purchasers may
acquire Rights from shareholders and
exercise those Rights separate and apart
from the terms of the Standby Purchase
Agreements. This Prospectus also covers
resales, from time to time, of shares
of Common Stock purchased by the Standby
Purchasers. See "The Rights Offering --
Standby Purchase Agreements," "Selling
Shareholders" and "Plan of
Distribution."
9
<PAGE> 12
Subscription Price.................. $______ in cash per share of Common
Stock.
Expiration Date..................... 5:00 p.m., Dallas time, , 1998
(subject to extension by EXCO). Rights
not exercised prior to the Expiration
Date will be void and will no longer be
exercisable by any Rights holder.
Procedure for Exercising
Rights............................ The Basic Subscription Privilege and the
Oversubscription Privilege may be
exercised by properly completing and
signing the Subscription Certificate
evidencing the Rights and forwarding
such Subscription Certificate (or
following the guaranteed delivery
procedures), together with payment of
the Subscription Price for each share of
Common Stock subscribed for pursuant to
the Basic Subscription Privilege and the
Oversubscription Privilege, to
Continental Stock Transfer & Trust
Company, as subscription agent (the
"Subscription Agent"), on or prior to
the Expiration Date. If forwarding
Subscription Certificates by mail, it is
recommended that insured, registered
mail be used. No interest will be paid
on funds delivered in payment of the
Subscription Price. The Instructions as
to use of EXCO Resources, Inc.
Subscription Certificates (the
"Instructions") accompanying the
Subscription Certificates should be read
carefully and followed in detail. See
"The Rights Offering-- Exercise of
Rights."
NO REVOCATION....................... ONCE A HOLDER OF RIGHTS HAS EXERCISED
THE BASIC SUBSCRIPTION PRIVILEGE OR THE
OVERSUBSCRIPTION PRIVILEGE, SUCH
EXERCISE MAY NOT BE REVOKED. SEE "THE
RIGHTS OFFERING -- NO REVOCATION."
Transferability of Rights........... The Rights are transferable, and it is
expected that they will trade on the OTC
until the close of business on the last
OTC trading day prior to the Expiration
Date. There can be no assurance,
however, that a market for the Rights
will develop or, if a market develops,
that the market will remain available
throughout the period during which
Rights may be exercised, or as to the
price at which the Rights will trade.
See "The Rights Offering-- Method of
Transferring Rights."
Certain Federal Income Tax
Considerations.................... For United States federal income tax
purposes, Rights holders generally
should not recognize taxable income in
connection with the issuance to them or
exercise by them of Rights. Rights
holders may incur gain or loss upon the
sale of the Rights or the shares of
Common Stock acquired upon exercise of
the Rights or upon the receipt of
dividends. See "Material Federal Income
Tax Considerations."
10
<PAGE> 13
OTC Symbols......................... The Common Stock is traded on the OTC
under the symbol "EXCO." It is
anticipated that the Rights and the
Common Stock will trade on the OTC under
the symbol "EXCO RT."
Common Stock........................ The terms of the Common Stock are
described under "Description of Capital
Stock."
Listing............................. EXCO has made application to list its
Common Stock on the Nasdaq National
Market System following completion of
the Rights Offering. There can be no
assurance the Common Stock will be
accepted for listing.
Resales by Affiliates............... Certain directors and officers of EXCO
who are also shareholders of EXCO (the
"Selling Rightsholders") including
Messrs. Miller, Eubank and Ellis, will
be receiving Rights on the same terms as
all other shareholders. This Prospectus
also covers the resale, if any, of
Rights by such Selling Rightsholders.
EXCO will not receive any of the
proceeds of such sales of Rights by a
Selling Rightsholder. See "Selling
Shareholders" and "Plan of
Distribution."
11
<PAGE> 14
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table presents selected historical financial data for
EXCO. The financial data should be read in conjunction with EXCO's financial
statements, the notes thereto and the other financial information, including pro
forma information, included elsewhere herein. In the opinion of management of
EXCO, the data presented reflect all adjustments considered necessary for a fair
presentation of the results for such periods. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the other
financial information included elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTH
TRANSITION
PERIOD ENDED FISCAL YEAR ENDED
DECEMBER 31, DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------ ----------------------------- ---------------------------
PRO FORMA PRO FORMA
1995(1) 1996(1) 1997 1997(5) 1997 1998 1998(5)
------------ ------- ------- --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and natural gas.............. $ 560 $ 872 $ 670 $ 3,078 $ 219 $ 173 $ 674
Other............................ 76 39 28 86 11 10 12
------------ ------- ------- --------- ------ ------ ---------
Total revenues................ 636 911 698 3,164 230 183 686
Costs and expenses:
Oil and natural gas production... 333 429 322 1,254 99 95 282
General and administrative....... 366 373 486 531 106 239 260
Depreciation, depletion and
amortization.................... 92 114 84 567 28 36 183
Interest Expenses................ 5 18 11 507 5 7 156
Other (2)........................ -- 303 -- -- -- -- --
------------ ------- ------- --------- ------ ------ ---------
Total expenses................ 796 1,237 903 2,859 238 377 881
------------ ------- ------- --------- ------ ------ ---------
Income (loss) before income taxes. (160) (326) (205) 305 (8) (194) (195)
Income taxes...................... -- -- -- 104 -- -- --
------------ ------- ------- --------- ------ ------ ---------
Net income (loss)................. $ (160) $ (326) $ (205) $ 201 $ (8) $ (194) $ (195)
============ ======= ======= ========= ====== ====== =========
Net income (loss) per share(3)(4). $ (.47) $ (.85) $ (.51) $ .41 $ (.02) $ (.38) $ (.33)
============ ======= ======= ========= ====== ====== =========
Weighted average common and
common equivalent shares
outstanding (3)................. 338 38 403 488 403 509 594
============ ======= ======= ========= ====== ====== =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1998
------------------------------ --------------------
PRO
1995 1996 1997 ACTUAL FORMA(5)
-------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
(In thousands)
BALANCE SHEET DATA:
Current assets....................... $582 $ 373 $ 727 $ 256 $ 980
Oil and natural gas properties, net.. 820 749 473 1,275 7,716
Total assets......................... 1,511 1,226 1,270 1,754 8,696
Current liabilities.................. 861 658 328 372 617
Long-term debt....................... 40 36 15 612 6,796
Stockholders' equity................. 610 532 927 770 1,283
</TABLE>
(1) The data for all prior years has been restated to reflect the change in
EXCO's method of accounting for oil and natural gas operations to the
full cost method of accounting. See Note 2 to EXCO's Financial
Statements. As a result of the change in the accounting method, net
income has been increased by $44,000 ($0.15 per share) for the year ended
March 31, 1994; the net loss for the year ended March 31, 1995, the nine
month period ended December 31, 1995 and the year ended December 31,
1996, has been decreased $40,000 ($0.12 per share), $184,000 ($0.54 per
share) and $3,000 ($0.01 per share), respectively.
(2) The $303,000 expense in fiscal 1996 represents the legal, accounting and
other expenses associated with the attempted acquisition by EXCO of
Taurus Energy Corp.
(3) Per share data has been restated to reflect the one-for-five reverse
stock split effective July 19, 1996 and the Reverse Stock Split effective
March 31, 1998. The adoption of Financial Accounting Standards Board No.
128, Earnings per Share, did not have a material impact on net income
(loss) per share amounts reported herein.
(4) EXCO has not paid any dividends during any of the periods presented.
(5) See "Pro Forma Combined Condensed Financial Statements" included
elsewhere in this Prospectus for a discussion of the preparation of this
data.
12
<PAGE> 15
<TABLE>
<CAPTION>
SUMMARY RESERVE AND PRODUCTION DATA
DECEMBER 31,
------------------------------------------
PRO FORMA
1996 1997 1997(4)
------------- ------------- ------------
<S> <C> <C> <C>
PRODUCTION DATA FOR THE YEAR ENDED:
Oil (Bbls)........................................................... 22,150 14,453 86,282
Natural gas (Mcf).................................................... 224,024 181,091 483,342
Barrel oil equivalents (Boe)......................................... 59,487 44,635 166,839
PROVED RESERVES AT YEAR END (1) (2):
Oil (Bbls)........................................................... 168,886 58,116 870,400
Natural gas (Mcf).................................................... 4,761,691 4,326,205 8,386,400
Barrel oil equivalents (Boe)......................................... 962,501 779,150 2,268,100
Percentage Proved Developed.......................................... 59.8% 57.3% 79.1%
PRICES AT YEAR END (2):
Oil (per Bbl)........................................................ $ 24.29 $ 16.74 $ 16.68
Natural gas (per Mcf)................................................ 3.40 2.11 2.04
FUTURE NET CASH FLOWS AT YEAR END (in thousands) (2):
Before tax .......................................................... $ 14,646 $ 6,985 $ 20,583
Discounted at 10%, before tax........................................ 8,319 4,028 13,059
Standardized Measures of Discounted Future Net Cash Flows (3)........ 8,319 3,865 12,231
</TABLE>
(1) As of December 31, 1996 and 1997, the proved oil and natural gas reserves
for substantially all of EXCO's properties were estimated by independent
petroleum engineering consultants. See "Business -- Reserves."
(2) Proved reserves and future net cash flows were estimated in accordance with
the Securities and Exchange Commission (the "Commission") guidelines.
Prices at December 31 in each of the years 1996 and 1997 were used in the
calculation of proved reserves and future net cash flows and were held
constant through the periods of estimated production, except as otherwise
provided by contract, in accordance with Commission guidelines. For
limitations on the accuracy and reliability of reserves and future net cash
flow estimates, see "Risk Factors -- Uncertainty of Estimates of Oil and
Natural Gas Reserves."
(3) The Standardized Measure of Discounted Future Net Cash Flows prepared by
EXCO represents the present value (using an annual discount rate of 10%) of
estimated future net revenues from the production of proved reserves, after
giving effect to income taxes. See Note 12 to EXCO's Financial Statements
herein for additional information regarding the disclosure of the
Standardized Measure of Discounted Future Net Cash Flows.
(4) See "Pro Forma Combined Condensed Financial Statements" included
elsewhere in this Prospectus for a discussion of the preparation of this
data. The production data represents the sum of the actual production
during 1997 for EXCO and with respect to the properties acquired or to be
acquired in the Maverick County Acquisition, the Jacobi-Johnson
Acquisition, the Gladstone Merger and the Dawson County Acquisition.
13
<PAGE> 16
RISK FACTORS
Holders of Rights should consider carefully the following factors
relating to the business of EXCO and the Rights Offering, together with the
information and financial data set forth elsewhere in this Prospectus, prior to
making an investment decision.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act
which can be identified by the use of forward-looking terminology such as,
"may," "believe," "expect," "intend," "anticipate," "estimate" or "continue" or
the negative thereof or other variations thereon or comparable terminology. All
statements other than statements of historical fact included in this Prospectus,
including without limitation, the statements under "Prospectus Summary," "Risk
Factors," "Pro Forma Combined Condensed Financial Statements," "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources," "Business and Properties -- Business
Strategy," "Business and Properties -- Oil and Natural Gas Reserves" and
"Certain Federal Income Tax Considerations -- Tax Consequences to Holders of
Rights" located elsewhere herein regarding EXCO's financial position and
liquidity, the volume or discounted present value of its oil and natural gas
reserves, its ability to service its indebtedness, its strategic plans including
its ability to locate and complete acquisitions of oil and natural gas assets,
and other matters, are forward-looking statements. Although EXCO believes that
the expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to have been correct.
Important factors with respect to any such forward-looking statements, including
certain risks and uncertainties that could cause actual results to differ
materially from EXCO's expectations ("Cautionary Statements") are disclosed in
this Prospectus, including, without limitation, in conjunction with the
forward-looking statements included in this Prospectus. Important factors that
could cause actual results to differ materially from those in the
forward-looking statements herein include, but are not limited to, the timing
and extent of changes in commodity prices for oil and natural gas, the need to
develop and replace reserves, environmental risks, drilling and operating risks,
risks related to exploitation and development, uncertainties about the estimates
of reserves, competition, government regulation and the ability of EXCO to meet
its stated business goals. All subsequent written and oral forward-looking
statements attributable to EXCO or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Statements.
FINANCIAL RISKS
FUTURE DEBT SERVICE
EXCO has arranged the Credit Facility to provide an additional source
of capital to finance EXCO's acquisition, development and exploitation strategy.
EXCO's level of indebtedness in the future could have certain effects on its
future operations, including that (i) a substantial portion of EXCO's cash flow
from operations could be dedicated to the payment of interest and principal on
its indebtedness and will not be available for other purposes, (ii) the
covenants contained in the Credit Facility require EXCO to meet certain
financial tests and other restrictions, will limit its ability to borrow
additional funds, to grant liens and to dispose of assets and will affect EXCO's
flexibility in planning for and reacting to changes in its business, including
possible acquisition activities, and (iii) EXCO's ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions,
general corporate purposes or other purposes may be impaired. The pledge of
substantially all of EXCO's assets as collateral for the Credit Facility will
for the foreseeable future make it difficult for EXCO to obtain financing on an
unsecured basis or to obtain secured financing other than certain "purchase
money" indebtedness collateralized by the acquired assets.
EXCO's ability to meet any future debt service obligations will be
dependent upon EXCO's future performance, which will be subject to oil and
natural gas prices, EXCO's level of production, general economic conditions and
to financial, business and other factors affecting the operations of EXCO, many
of which are beyond its control. There can be no assurance that EXCO's future
performance will not be adversely affected by such changes in oil and natural
gas prices and/or production nor by such economic conditions and/or financial,
business and other factors. In addition, there can be no assurance that EXCO's
business will generate sufficient cash flow from operations or that future bank
credit will be available in an amount sufficient to enable EXCO to service its
indebtedness or make necessary expenditures. In such event, EXCO would be
required to obtain such financing from
14
<PAGE> 17
the sale of equity securities or other debt financing. There can be no assurance
that any such financing will be available on terms acceptable to EXCO. Should
sufficient capital not be available, EXCO may not be able to continue to
implement its business strategy. See "Management's Discussion and Analysis of
Financial Position and Results of Operations -- Liquidity and Capital
Resources."
HISTORY OF LOSSES
EXCO had net losses of $160,000, $326,000 and $205,000, for the nine
months ended December 31, 1995 and the years ended December 31, 1996 and 1997,
respectively. EXCO had a net loss of $194,000 for the first three months ended
March 31, 1998 due to a $133,000 increase in general and administrative costs.
This increase reflects EXCO's increased staffing and new focus on reserve
acquisitions. There is no assurance that EXCO will consummate any acquisitions
in the future and, to the extent that natural gas and crude oil prices are low,
such losses may be substantial. See "-- Business and Industry Risks -- Effects
of Changing Prices" and "Pro Forma Combined Condensed Financial Statements."
RIGHTS OFFERING RISKS
MARKET CONSIDERATIONS
The Subscription Price was determined by the Board of EXCO and may not
reflect the actual or fair value of EXCO or the Common Stock. The price was
determined after considering such factors as the price paid by Messrs. Miller,
Eubank and Ellis for the purchase of their shares in December 1997 after taking
into account the Reverse Stock Split, the current trading price for the Common
Stock, future prospects of EXCO, the industry in general and EXCO's position in
the industry, market valuations of the securities of companies engaged in
similar activities, the quality of the management team and negotiations with the
Standby Purchasers. At the time the Subscription Price for the Rights Offering
was determined, such price represented a ___% discount to the market price for
EXCO's Common Stock. There is currently no public market for the Rights.
Although the Rights will be listed for trading on the OTC, there can be no
assurance that an active public market will develop or be sustained for the
Rights, that the market price of the Common Stock will not decline during the
subscription period or that, following the issuance and exercise of the Rights,
a subscribing Rights holder will be able to sell shares of Common Stock
purchased in the Rights Offering at a price equal to or greater than the
Subscription Price. The market price of the Common Stock could be subject to
significant fluctuations in response to EXCO's operating results and other
factors, including the size of the public float of the Common Stock (which will
depend in part on the percentage of the Rights that are exercised pursuant to
the Rights Offering).
The effect of the discount on the market price for the Rights may
increase the trading values for the Rights relative to what those trading values
might be if such discount were not present. However, due to the inherent value
of the Rights, the market price for EXCO's Common Stock may decrease by an
amount that approximates the value of the Rights when the Rights are distributed
and begin to trade as a separate security.
IRREVOCABILITY OF SUBSCRIPTIONS
The election to exercise Rights is irrevocable. Until certificates
representing shares of Common Stock are delivered, subscribing Rights holders
may not be able to sell such shares. Certificates representing shares of Common
Stock purchased in the Rights Offering will be delivered by mail as soon as
practicable following the Expiration Date. No interest will be paid to Rights
holders on funds delivered to the Subscription Agent pursuant to the exercise of
Rights pending delivery of such certificates and return of any excess funds not
applied to the purchase of shares.
NO MINIMUM SUBSCRIPTION
There is no minimum number of shares that must be subscribed for in the
Rights Offering. The Standby Purchase Agreements are conditioned upon Rights for
3,000,000 shares being exercised. However, even if this condition is not met, it
is EXCO's intention to consummate the Rights Offering and issue the number of
shares of Common Stock actually subscribed for, without performance of the
Standby Purchase Agreements. To the extent that this Rights Offering is not
fully subscribed for, EXCO would receive a smaller sum of net proceeds and its
growth strategy may be slowed.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Haynes and Boone, LLP has rendered an opinion that the holders of
Common Stock should recognize no income or gain for federal income tax purposes
upon the receipt, exercise or lapse of the Rights, although this matter is not
free from doubt. Nevertheless, the federal income tax treatment of the
distribution of Rights to holders of Common Stock and any subsequent exercise or
lapse of such Rights is subject to some uncertainty with respect to the
characterization of the distribution of the Rights under the Internal Revenue
Code of 1986, as amended. See "Certain Federal Income Tax Considerations" for a
more detailed discussion of the federal income tax consequences resulting from
the purchase, ownership and disposition of Rights.
15
<PAGE> 18
BUSINESS AND INDUSTRY RISKS
NEED FOR ADDITIONAL FINANCING FOR GROWTH
The growth of EXCO's business will require substantial capital on a
continuing basis. There is no assurance that any such required additional funds
would be available on satisfactory terms and conditions, if at all. There is
also no assurance that EXCO will not pursue, from time to time, opportunities to
acquire oil and natural gas properties and businesses that may utilize the
capital currently expected to be available for its present operations. The
amount and timing of EXCO's future capital requirements, if any, will depend
upon a number of factors, including drilling costs, transportation costs,
equipment costs, marketing expenses, staffing levels and competitive conditions,
and any purchases or dispositions of assets, many of which are not within EXCO's
control. Failure to obtain any required additional financing could materially
adversely affect the growth, cash flow and earnings of EXCO. In addition, EXCO's
pursuit of additional capital could result in the incurrence of additional debt
or potentially dilutive issuances of additional equity securities. See
"Management's Discussion and Analysis of Financial Position on Results of
Operations -- Liquidity and Capital Resources."
CONCENTRATION OF PRODUCTION
Four properties which currently include 2 wells account for 75% of
EXCO's SEC PV-10 value based on proved reserves (including proved undeveloped
reserves) at December 31, 1997. On a pro forma basis, 44 properties which
currently include 52 wells account for 75% of EXCO's SEC PV-10 value based on
proved reserves (including proved undeveloped reserves) at December 31, 1997.
Accordingly, to the extent that EXCO experiences any operating difficulties in
connection with such wells or that the estimated proved reserves attributable
thereto are less than those that are currently estimated to exist or to the
extent EXCO is unable to fully develop proved reserves currently classified as
proved undeveloped reserves, EXCO could be adversely affected.
GEOGRAPHIC RESTRICTIONS
Pursuant to the non-competition provisions of Mr. Miller's employment
agreement with Coda, Mr. Miller, and as a result EXCO, is prohibited for a
period of one year beginning November 26, 1997 from acquiring or seeking to
acquire any rights or interest in any of sixteen properties in which Coda has an
existing interest or which it was studying at November 26, 1997. This
restriction also extends to two oil and natural gas companies. Some of these
locations are in areas in which EXCO might have an interest and generally
represent the types of properties EXCO would be interested in acquiring. The
non-competition restrictions may adversely effect, at least in the short term,
EXCO's ability to execute its growth strategy.
INABILITY TO DEVELOP ADDITIONAL RESERVES
EXCO's future success as an oil and natural gas producer, as is
generally the case in the industry, depends upon its ability to find, develop
and acquire additional oil and natural gas reserves that are economically
recoverable. Except to the extent that EXCO conducts successful development
activities or acquires properties containing proved reserves, EXCO's proved
reserves will generally decline as reserves are produced. There can be no
assurance that EXCO will be able to locate additional reserves or that EXCO will
drill economically productive wells or acquire properties containing proved
reserves. See "Business and Properties -- Acreage" and "-- Drilling Activities."
ACQUISITION RISKS
EXCO's business strategy includes focused acquisitions of producing oil
and natural gas properties. Any such future acquisitions will require an
assessment of the recoverable reserves, future oil and natural gas prices,
operating costs, potential environmental and other liabilities and other similar
factors. It generally is not feasible to review in detail every individual
property involved in an acquisition. Ordinarily, review efforts are focused on
the higher-valued properties. However, even a detailed review of all properties
and records may not reveal existing or potential problems; nor will it permit
EXCO to become sufficiently familiar with the properties to assess fully their
deficiencies and capabilities. Inspections are not always performed on every
well, and potential problems, such as mechanical integrity of equipment and
environmental conditions that may require significant remedial expenditures, are
not necessarily observable even when an inspection is undertaken. Even if
problems are identified, the seller may be unwilling or unable to provide
effective contractual protection against all or part of such problems. There can
be no assurance that oil and natural gas properties acquired by EXCO will be
successfully integrated into EXCO's operations or will achieve desired
profitability objectives.
16
<PAGE> 19
DRILLING RISKS
EXCO's drilling involves numerous risks, including the risk that no
commercially productive natural gas or oil reservoirs will be encountered. EXCO
must incur significant expenditures for the identification and acquisition of
properties and for the drilling and completion of wells. The cost of drilling,
completing and operating wells is often uncertain, and drilling operations may
be curtailed, delayed or canceled as a result of a variety of factors, including
unexpected drilling conditions, pressure or irregularities in formations,
equipment failures or accidents, weather conditions and shortages or delays in
the delivery of equipment. In addition, any use by EXCO of 3-dimensional seismic
and other advanced technology requires greater pre-drilling expenditures than
traditional drilling strategies. There can be no assurance as to the success of
EXCO's future drilling activities.
UNCERTAINTY OF ESTIMATES OF OIL AND NATURAL GAS RESERVES
Numerous uncertainties are inherent in estimating quantities of proved
oil and natural gas reserves, including many factors beyond the control of EXCO.
This Prospectus contains an estimate of EXCO's proved oil and natural gas
reserves and the estimated future net cash flows and revenue therefrom based
upon reports of EXCO's independent petroleum engineers. Such reports rely upon
various assumptions, including assumptions required by the Commission, as to
constant oil and natural gas prices, drilling and operating expenses, capital
expenditures, taxes and availability of funds and such reports should not be
construed as the current market value of the estimated proved reserves. The
process of estimating oil and natural gas reserves is complex, requiring
significant decisions and assumptions in the evaluation of available geological,
engineering and economic data for each reservoir. As a result, such estimates
are inherently an imprecise evaluation of reserve quantities and the future net
revenue therefrom. Actual future production, revenue, taxes, development
expenditures, operating expenses and quantities of recoverable oil and natural
gas reserves may vary substantially from those assumed in the estimate. Any
significant variance in these assumptions could materially affect the estimated
quantity and value of reserves set forth in this Prospectus. In addition, EXCO's
reserves may be subject to downward or upward revision, based upon production
history, results of future exploitation and development, prevailing oil and
natural gas prices and other factors. See "Business and Properties -- Oil and
Natural Gas Reserves."
GEOGRAPHIC CONCENTRATION OF OPERATIONS
Virtually all of EXCO's current operations are located in Texas and
Louisiana. Because of this concentration, any regional events that increase
costs or competition, reduce availability of equipment or supplies, reduce
demand or limit production will impact EXCO more adversely than if EXCO was
geographically diversified.
CERTAIN INDUSTRY AND MARKETING RISKS
EXCO's operations are subject to the risks and uncertainties associated
with drilling for, producing and transporting of oil and natural gas. EXCO's
future ability to market its natural gas and oil production will depend upon the
availability and capacity of natural gas gathering systems and pipelines and
other transportation facilities. Federal and state regulation of oil and natural
gas production and transportation, general economic conditions, changes in
supply and in demand all could materially adversely affect EXCO's ability to
market its oil and natural gas production. See "Business and Properties --
Products, Markets and Revenues" and "-- Regulation."
EFFECTS OF CHANGING PRICES
The future financial condition and results of operations of EXCO depend
upon the prices it receives for its oil, natural gas and the costs of acquiring,
developing and producing oil and natural gas. Oil and natural gas prices have
historically been volatile and are subject to fluctuations in response to
changes in supply, market uncertainty and a variety of additional factors that
are also beyond EXCO's control. These factors include, without limitation, the
level of domestic production, the availability of imported oil and natural gas,
actions taken by foreign oil and natural gas producing nations, the availability
of transportation systems with adequate capacity, the availability of
competitive fuels, fluctuating and seasonal demand for natural gas, conservation
and the extent of governmental regulation of production, weather, foreign and
domestic government relations, the price of domestic and imported oil and
natural gas, and the overall economic environment. A substantial or extended
decline in oil and/or natural gas prices could have a material adverse effect on
EXCO's estimated value of its natural gas and oil reserves, and on its financial
position, results of operations and access to capital. EXCO does not currently
use any financial
17
<PAGE> 20
products to hedge commodity price volatility risk, although it may use such
financial products in the future. EXCO does not currently have a hedging policy.
EXCO's ability to maintain or increase its borrowing capacity, to repay current
or future indebtedness and to obtain additional capital on attractive terms is
substantially dependent upon oil and natural gas prices. See "Business and
Properties -- Products, Markets and Revenues."
EXCO uses the full cost method of accounting for its investment in oil
and natural gas properties. Under the full cost method of accounting, all costs
of acquisition, exploration and development of oil and natural gas reserves are
capitalized into a "full cost pool" as incurred, and properties in the pool are
depleted and charged to operations using the unit-of-production method based on
the ratio of current production to total proved oil and natural gas reserves. To
the extent that such capitalized costs (net of accumulated depreciation,
depletion and amortization) less deferred taxes exceed the SEC PV-10 of
estimated future net cash flow from proved reserves of oil and natural gas, and
the lower of cost or fair value of unproved properties after income tax effects,
such excess costs are charged against earnings. Once incurred, a write-down of
oil and natural gas properties is not reversible at a later date even if oil or
natural gas prices increase.
OPERATING HAZARDS AND UNINSURED RISKS
EXCO's operations are subject to the risks inherent in the oil and
natural gas industry, including the risks of fire, explosions, blow-outs, pipe
failure, abnormally pressured formations and environmental accidents such as oil
spills, gas leaks, ruptures or discharges of toxic gases, brine or well fluids
into the environment (including groundwater contamination). The occurrence of
any of these risks could result in substantial losses to EXCO due to injury or
loss of life, severe damage to or destruction of property, natural resources and
equipment, pollution or other environmental damage, clean-up responsibilities,
regulatory investigation and penalties and suspension of operations. In
accordance with customary industry practice, EXCO maintains insurance against
some, but not all, of the risks described above. There can be no assurance that
any insurance maintained by EXCO will be adequate to cover any such losses or
liabilities. Further, EXCO cannot predict the continued availability of
insurance, or availability at commercially acceptable premium levels. EXCO does
not carry business interruption insurance. Losses and liabilities arising from
uninsured or under-insured events could have a material adverse effect on the
financial condition and operations of EXCO. From time to time, due primarily to
contract terms, pipeline interruptions or weather conditions, the producing
wells in which EXCO owns an interest have been subject to production
curtailments. The curtailments range from production being partially restricted
to wells being completely shut-in. The duration of curtailments varies from a
few days to several months. In most cases EXCO is provided only limited notice
as to when production will be curtailed and the duration of such curtailments.
EXCO is not currently experiencing any material curtailment on its production.
SUBSTANTIAL COMPETITION
The oil and natural gas industry is highly competitive and there are
many other companies engaged in the oil and natural gas business. EXCO is likely
to encounter substantial competition from major oil companies, other independent
oil and natural gas concerns and individual producers and operators in acquiring
oil and natural gas properties suitable for exploitation and development. Many
of the companies with which EXCO competes have substantially greater financial,
technical and other resources and may have greater experience in the oil and
natural gas business than EXCO. Therefore, competitors may be able to pay more
for desirable leases and to evaluate, bid for and purchase a greater number of
properties or prospects than the financial or personnel resources of EXCO will
permit. See "Business and Properties -- Competition."
MARKET FOR COMMON STOCK
EXCO cannot ensure that an active trading market for the Common Stock
on the OTC or any other market will develop or be sustained subsequent to the
offering made hereby. After completion of the offering made hereby, the market
for the Common Stock may be influenced by many factors, including the depth and
liquidity of the market for the Common Stock, investor perceptions of EXCO and
general economic and other similar conditions. EXCO intends to make application
to list its Common Stock on the Nasdaq National Market System following
completion of the Rights Offering. There can be no assurance the Common Stock
will be approved for listing.
18
<PAGE> 21
VOLATILITY OF STOCK PRICE
The market price for shares of the Common Stock has varied
significantly and may be volatile depending on news announcements or changes in
general market conditions. In particular, news announcements, quarterly results
of operations, competitive developments, litigation or governmental regulatory
action impacting EXCO may adversely affect the Common Stock price. In addition,
because the number of shares of Common Stock held by the public is relatively
small, the sale of a substantial number of shares of the Common Stock in a short
period of time could adversely affect the market price of the Common Stock. See
"Price Range of Common Stock and Dividend Policy."
DIVIDEND POLICY
EXCO has never paid cash dividends on its Common Stock and does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
The Common Stock is not a suitable investment for persons requiring current
income. See "Price Range of Common Stock and Dividend Policy."
ANTI-TAKEOVER EFFECT OF ARTICLES OF INCORPORATION AND POSSIBLE
ISSUANCES OF PREFERRED STOCK
Certain provisions of the Articles of Incorporation may delay, defer or
prevent a tender offer or takeover attempt that a shareholder might consider to
be in such shareholder's best interest, including attempts that might result in
a premium over the market price for the stock held by shareholders. The Articles
of Incorporation permit the Board to issue up to 10,000,000 shares of preferred
stock and to establish by resolution one or more series of preferred stock and
to establish the powers, designations, preferences and relative, participating,
optional or other special rights of each series of preferred stock. The
preferred stock could be issued on terms that are unfavorable to the holders of
Common Stock, including the grant of superior voting rights, the grant of
preferences in favor of preferred shareholders in the payment of dividends and
upon liquidation of EXCO and the designation of conversion rights that entitle
holders of preferred stock to convert their shares into Common Stock on terms
that are dilutive. The issuance of preferred stock could make a takeover or
change in control of EXCO more difficult. EXCO however does not intend to use
the provisions of the Articles of Incorporation to delay, defer or prevent a
tender offer or takeover attempt. Article 13 of the Texas Business Corporation
Act also provides certain protections to shareholders of publicly-held Texas
corporations such as EXCO from certain takeover attempts. See "Description of
Capital Stock."
DEPENDENCE UPON KEY PERSONNEL
EXCO is substantially dependent upon two key individuals within its
management, Mr. Miller and Mr. Eubank. The loss of the services of either one of
these individuals could have a material adverse impact upon EXCO. EXCO does not
have key man insurance on either of these two individuals.
GOVERNMENTAL REGULATION
GENERAL
EXCO's operations are affected from time to time in varying degrees by
political developments and federal and state laws and regulations. In
particular, oil and natural gas production, operations and economics are or have
been affected by price controls, taxes and other laws relating to the oil and
natural gas industry, by changes in such laws and by changes in administrative
regulations. EXCO cannot predict how existing laws and regulations may be
interpreted by enforcement agencies or court rulings, whether additional laws
and regulations will be adopted, or the effect such changes may have on its
business or financial condition. Matters subject to regulation include discharge
permits for drilling operations, drilling and abandonment bonds or other
financial responsibility requirements, reports concerning operations, the
spacing of wells, unitization and pooling of properties, and taxation. There can
be no assurance that new laws or regulations, or modifications of or new
interpretations of existing laws and regulations, will not increase
substantially the cost of compliance or otherwise adversely affect EXCO's oil
and natural gas operations and financial condition or that material indemnity
claims will not arise against EXCO with respect to properties acquired by or
from EXCO. See "Business and Properties -- Regulation."
19
<PAGE> 22
ENVIRONMENTAL
EXCO's operations are subject to numerous laws and regulations
governing the discharge of materials into the environment or otherwise relating
to environmental protection. These laws and regulations require the acquisition
of a permit before drilling commences, restrict the types, quantities and
concentration of various substances that can be released into the environment in
connection with drilling and production activities, limit or prohibit drilling
activities on certain lands lying within wilderness, wetlands and other
protected areas, and impose substantial liabilities for pollution which might
result from EXCO's operations. Moreover, the recent trend toward stricter
standards in environmental legislation and regulation is likely to continue. For
instance, legislation has been proposed in Congress from time to time that would
reclassify certain crude oil and natural gas exploitation and production wastes
as "hazardous wastes" which would make the reclassified wastes subject to much
more stringent handling, disposal and clean-up requirements. If such legislation
were to be enacted, it could have a significant impact on the operating costs of
EXCO, as well as the oil and natural gas industry in general. Initiatives to
further regulate the disposal of crude oil and natural gas wastes are also
pending in certain states, and these various initiatives could have a similar
impact on EXCO. EXCO could incur substantial costs to comply with environmental
laws and regulations. In addition to compliance costs, government entities and
other third parties may assert substantial liabilities against owners and
operators of oil and natural gas properties for oil spills, discharge of
hazardous materials, remediation and clean-up costs and other environmental
damages, including damages caused by previous property owners. As a result,
substantial liabilities to third parties or governmental entities may be
incurred, the payment of which could reduce or eliminate the funds available for
project investment or result in loss of EXCO's properties. Although EXCO
maintains insurance coverage it considers to be customary in the industry, it is
not fully insured against certain of these risks, either because such insurance
is not available or because of high premium costs. Accordingly, EXCO may be
subject to liability or may lose substantial portions of properties due to
hazards that cannot be insured against or have not been insured against due to
prohibitive premium costs or for other reasons. The imposition of any such
liabilities on EXCO could have a material adverse effect on EXCO's financial
condition and results of operations.
The Oil Pollution Act of 1990 ("OPA") imposes a variety of regulations
on "responsible parties" related to the prevention of oil spills. The
implementation of new, or the modification of existing, environmental laws or
regulations, including regulations promulgated pursuant to the Oil Pollution Act
of 1990, could have a material adverse impact on EXCO. While EXCO does not
anticipate incurring material costs in connection with environmental compliance
and remediation, it cannot guarantee that material costs will not be incurred.
See "Business and Properties -- Regulation."
20
<PAGE> 23
RECENT DEVELOPMENTS
CHANGE OF CONTROL
On December 19, 1997, Mr. Miller purchased (the "Purchase") 413,423
shares of Common Stock. Upon completion of the Purchase, Mr. Miller became the
beneficial owner of approximately 51% of the Common Stock of EXCO.
The Purchase was effected pursuant to the terms of a Stock Option
Agreement first dated December 8, 1997 among Mr. Miller, on the one hand, and
Richard D. Collins, Dave Fitzgerald, Inc., David N. Fitzgerald, Francis C.
Fitzgerald, W.R. Granberry, Glenn L. Seitz, Suzanne F. Bobo, J.A. Dinger, John
A. Schlensker, Donald C. Thomas, Jr. and R. Scott Collins (collectively, the
"Sellers"), on the other (the "Option Agreement"). The Sellers included members
of EXCO's management and certain affiliates. On December 18, 1997, Mr. Miller
exercised his option to purchase the shares. On December 19, 1997, Mr. Miller
executed a Stock Purchase Agreement among Mr. Miller, on the one hand, and
certain Sellers, on the other (the "Purchase Agreement"). Pursuant to the terms
of the Option Agreement and the Purchase Agreement, the Purchase was consummated
December 19, 1997. In connection with the Purchase, Mr. Miller paid the Sellers
an aggregate of approximately $1,240,269 in cash from personal funds. The
consideration paid by Mr. Miller in connection with the Purchase was determined
by arms' length negotiations between Mr. Miller and the Sellers.
In addition, on December 19, 1997, the Board of Directors of EXCO held
a meeting at which time the resignations of various officers and directors of
EXCO were tendered and accepted. The Board appointed Mr. Miller as a Director
and then elected him Chairman and Chief Executive Officer of EXCO. The Board
also appointed Mr. Eubank to the Board of Directors and elected him President,
Treasurer and Chief Financial Officer of EXCO. Mr. Dave N. Fitzgerald resigned
as Chairman of the Board of EXCO, Mr. Charles W. Gleeson resigned as President
and Chief Executive Officer of EXCO, Mr. Glenn L. Seitz resigned as a Director
and Treasurer of EXCO, Mr. Richard D. Collins resigned as a Director and
Secretary of EXCO and Mr. W.R. Granberry resigned as a Director of EXCO. Mr.
Richard E. Miller was elected Secretary of EXCO. Messrs. Fitzgerald and Gleeson
remained as Directors of EXCO.
On December 31, 1997, EXCO issued, in a private placement, 100,000
shares of Common Stock to Mr. Eubank for an aggregate purchase price of
$300,000, or $3.00 per share ($6.00 per share equivalent after adjusting for the
Reverse Stock Split). In addition, on that same date EXCO issued, in a private
placement, 100,000 shares to Mr. Ellis for an aggregate purchase price of
$300,000, or $3.00 per share ($6.00 per share equivalent after adjusting for the
Reverse Stock Split). All of the shares so issued are deemed "restricted" shares
under the Federal securities laws. The $600,000 aggregate gross purchase
consideration will be used as general corporate working capital by EXCO. As of
December 31, 1997, EXCO had outstanding 1,005,300 shares of Common Stock.
On December 31, 1997, Mr. Eubank resigned as Chief Financial Officer
and Dr. Ramsey was appointed Chief Financial Officer and Vice President of EXCO.
MAVERICK COUNTY ACQUISITION
EXCO is seeking to grow and diversify its operations through the
acquisition of certain energy assets including producing properties. On January
22, 1998, EXCO entered into a letter of intent to acquire the Maverick County
Properties. On February 11, 1998, EXCO consummated a purchase and sale agreement
for the Maverick County Properties. The purchase price for the Maverick County
Properties was $760,200.
On December 31, 1997, the Maverick County Properties were estimated to
contain 8,011 Bbls of oil and 2,447,785 Mcf of gas or 415,975 Boe of proved
reserves, 98% of which were natural gas, and owned leasehold interests in a
total of 3,744 gross acres (3,123 net acres) of oil and natural gas properties,
9.6% of gross acres which were developed acres. The Maverick County Properties
include 9 gross productive wells (7.0 net productive wells) and 2 gross (1.87
net) non-producing wells which may require recompletions, workovers or
abandonment.
21
<PAGE> 24
EXCO has identified at least two potential development well locations, one of
which was drilled and completed as a producing gas well in April 1998. The
Maverick County Properties include 360 gross (280 net) developed acres and 3,384
gross (2,843 net) undeveloped acres. Approximately 66% of the estimated proved
reserves of the Maverick County Properties were classified as developed. The
acquisition also includes an 86.9% interest in a natural gas gathering system
and an 88% interest in a natural gas treating facility, both of which were
operated by Osborne Oil Company. The Maverick County Properties were mortgaged
under the Credit Facility. See "Business and Properties of EXCO -- Oil and
Natural Gas Reserves" and "-- Acreage."
JACOBI-JOHNSON ACQUISITION
On May 8, 1998, EXCO acquired all of the outstanding common stock of
Jacobi-Johnson. Jacobi-Johnson owns oil and natural gas working interests
located in Polk, Nacogdoches, Navarro, Smith and Wood Counties, Texas. The
Jacobi-Johnson Properties include 34 gross producing (14.3 net producing) wells
with current net production of approximately 59.4 Bbls of oil and 171,000 cubic
feet of natural gas per day. In addition to the producing wells, the
Jacobi-Johnson Properties include working interests in two saltwater disposal
wells. As of December 31, 1997, the Jacobi-Johnson Properties are estimated to
contain proved reserves of 234,985 Bbls of oil and 597,880 Mcf of natural gas.
Approximately 100% of the estimated proved reserves of the Jacobi-Johnson
Properties are classified as developed.
The aggregate purchase price paid for the stock was $1,476,451, subject
to post-closing adjustments. Post-closing adjustments may be made if it is
determined within 90 days of the closing that the net working capital of
Jacobi-Johnson as of January 1, 1998 is different than what was calculated at
closing, or if any title problems are discovered within 60 days of the closing.
The Sellers have agreed to indemnify EXCO for amounts arising from any breach by
Sellers, including environmental damages, to the extent such amount exceeds
$20,000. EXCO has agreed to indemnify the Sellers for amounts arising from any
breach by EXCO, to the extent such amount exceeds $20,000. The acquisition was
effective January 1, 1998. The amount of consideration was determined through
arm's length negotiations taking into account estimates of recoverable reserves,
current oil and natural gas prices, the fair market value of other property and
equipment, the amount of cash and cash equivalents on hand, the collectibility
and estimated payment timing of accounts receivable and the amount of current
and long-term liabilities. The consideration consisted of $703,035 cash and
85,436 shares of EXCO Common Stock. EXCO also assumed approximately $260,800 of
Jacobi-Johnson indebtedness. Simultaneously with the Closing, EXCO paid in full
approximately $245,000 of Jacobi-Johnson's outstanding indebtedness owed to
Southside Bank. EXCO obtained the cash for the purchase price and payoff of
the Southside Bank loans under the Credit Facility. The Jacobi-Johnson
Properties have been mortgaged under the Credit Facility.
GLADSTONE MERGER
On May 1, 1998, EXCO entered into the Merger Agreement with Gladstone.
Gladstone is a Dallas, Texas based oil and natural gas production company with
properties in Kent, Stonewall, Schleicher, Pecos and Madison Counties, Texas,
and San Juan County, New Mexico.
Under terms of the Merger Agreement, Gladstone stockholders will
receive approximately $1.4 million, or $.33 per share, in cash. It is currently
anticipated that the transaction will close during the third quarter of 1998,
with EXCO being the surviving corporation. EXCO intends to fund this transaction
with the net proceeds of the Rights Offering, unless the merger can be completed
prior to completion of the Rights Offering, in which case EXCO will fund the
merger with borrowings under the Credit Facility. The transaction is subject to
customary conditions of closing including review by the Commission of
Gladstone's proxy materials, approval by Gladstone's board of directors and
stockholders, approval by EXCO's board of directors and due diligence inspection
by EXCO. EXCO can offer no assurance that the merger will be approved or that
the transaction will be completed.
In addition to the Merger Agreement, as of May 1, 1998, EXCO entered
into a Stock Option Agreement with one Gladstone stockholder, Mr. Brooks,
granting EXCO an option to acquire 1,910,000 shares, or approximately 44.8%, of
Gladstone's issued and outstanding common stock at a price of $.33 per share.
Mr. Brooks is Chairman and President of Gladstone. As of May 1, 1998, EXCO also
entered into a Stockholder Agreement whereby three Gladstone stockholders,
Deborah Brooks Garrett, Rebecca B. Feldt and Carol Brady, have agreed to vote
their
22
<PAGE> 25
shares in favor of the merger with EXCO. These stockholders own 351,000 shares
each or approximately 8.3% each of Gladstone's outstanding common stock.
DAWSON COUNTY ACQUISITION
On June 30, 1998, EXCO completed the acquisition of certain oil and
natural gas properties from J.M. Hill, J.M. Hill, Trustee, Walter O. Hill,
Steven J. Devos, Bart Humphrey and various working interest owners. The Dawson
County Properties include 11 gross (5.3 net) producing wells with current net
production of 138.4 Bbls of oil and 59 Mcf of natural gas per day and 4 gross
(1.5 net) saltwater disposal and non-producing wells which may require
recompletions, workovers or abandonment. The Dawson County Properties include
645 gross (327 net) developed acres and 627 gross (279 net) undeveloped acres.
The purchase price was approximately $3.5 million cash to be paid for using
funds available under EXCO's Credit Facility.
CREDIT FACILITY
On February 11, 1998, EXCO entered into the Credit Facility with
NationsBank of Texas, N.A. The Credit Facility provides for borrowings not to
exceed $50 million, subject to borrowing base limitations. The Credit Facility
consists of a regular revolver which at June 30, 1998, had a borrowing base of
$6.7 million. As of June 30, 1998 approximately $680,000 was available to be
borrowed under the Credit Facility. A portion of the borrowing base is available
for the issuance of letters of credit. All borrowings under the Credit Facility
are secured by a first lien deed of trust providing a security interest in
tangible and intangible assets representing at least 90% of the estimated
present value of EXCO's oil and natural gas properties. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
ANNUAL MEETING OF SHAREHOLDERS
On March 31, 1998 EXCO held its Annual Meeting of Shareholders (the
"Meeting"). Several Board proposals, including two amendments to the Restated
Articles of Incorporation, were approved by the shareholders at the Meeting.
BOARD OF DIRECTORS
At the Meeting, the shareholders considered and approved the Board's
proposal to amend the Restated Articles of Incorporation to allow the Board to
fix the number of directors by resolution. At the Meeting, the shareholders
elected Messrs. Miller, Eubank, Ramsey, Pickens, Smith, Ellis and Muckleroy as
directors.
REVERSE STOCK SPLIT
At the Meeting, the shareholders considered and approved an amendment
to the Restated Articles of Incorporation to effect a one-for-two reverse stock
split, to maintain the number of authorized shares of Common Stock at 25,000,000
and to double the par value of the Common Stock from $0.01 to $0.02 per share.
EXCO effected the Reverse Stock Split effective March 31, 1998.
1998 STOCK OPTION PLAN
At the Meeting, the shareholders approved the EXCO Resources, Inc. 1998
Stock Option Plan (the "1998 Stock Option Plan") effective as of March 13, 1998.
Under the 1998 Stock Option Plan, any EXCO employee (including an
employee who is also a director or an officer), consultants or directors may
receive incentive compensation based on criteria established by the Board of
Directors. Options to purchase up to 1,000,000 shares (as adjusted for the
Reverse Stock Split) may be granted under the 1998 Stock Option Plan.
23
<PAGE> 26
USE OF PROCEEDS
The total proceeds (assuming a $6.00 per share Subscription Price for
the purposes of this table) from the Rights Offering are estimated to be
approximately $35,660,160 (assuming all Rights are exercised). The following
table sets forth the proposed sources and uses of funds from the Rights
Offering. For a description of the Rights Offering, see "The Rights Offering."
To the extent EXCO raises proceeds from the Rights Offering, EXCO
intends to first repay its indebtedness and then fund the Gladstone Merger. Any
excess proceeds will be initially invested in short term, interest bearing debt
obligations of the federal government or investment grade corporate borrowers
and certificates of deposit and similar federally insured obligations. EXCO
intends to use the remaining net proceeds of the Rights Offering to fund
acquisitions consistent with its business strategy and to fund other general
corporate working capital requirements including oil and natural gas leasing
activity, drilling and workover projects and other exploitation and development
activities. Other than as described in this Prospectus, EXCO does not have any
agreements or understandings regarding acquisitions or merger transactions. EXCO
believes that the availability of the remaining net proceeds will enhance EXCO'S
ability to compete for and complete additional acquisitions, including
acquisitions larger than those EXCO has been able to undertake to date. However,
there can be no assurances given on the timing or success of such activities.
There is no minimum amount required to be subscribed for pursuant to
the Rights Offering. Moreover, the Ares Standby Purchase Agreement is
conditioned upon at least 3,000,000 shares being subscribed for by holders of
Rights. The Oaktree Standby Purchase Agreement is conditioned upon exercise
of the Ares Standby Purchase Agreement. There is no assurance that 3,000,000
shares will be subscribed for. Nevertheless, EXCO intends to complete the Rights
Offering regardless of the number of shares that may be subscribed for.
Accordingly, the actual net proceeds from the Rights Offering could be less than
the amounts shown in the following table.
<TABLE>
<CAPTION>
AMOUNTS
-------------
(in millions)
<S> <C>
SOURCES
Common Stock........................................................................ $ 35.7
---------
Total ..................................................................... $ 35.7
=========
USES
Gladstone Merger (2)................................................................ $ 1.4
Repay indebtedness (1) (2).......................................................... 6.1
Working capital (2) (3)............................................................. 28.0
Rights Offerings expenses (4) ...................................................... .2
---------
Total ..................................................................... $ 35.7
=========
</TABLE>
(1) Includes repayment of approximately $6.1 million outstanding under
EXCO's Credit Facility (including $600,000 borrowed on February
11, 1998 as a result of the Maverick County Acquisition, $900,000
borrowed on May 8, 1998 as a result of the Jacobi-Johnson
Acquisition), and $3.5 million drawn in June 1998 to fund the
Dawson County Acquisition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources -- New Credit Facility" for
additional information with respect to the terms of the Credit
Facility, including the interest rate.
(2) If EXCO completes the merger with Gladstone before completion of
the Rights Offering, indebtedness would be increased by $1.4
million to $7.5 million. At the time of the Rights Offering, then,
$7.5 million of the net proceeds of the Rights Offering would be
used to repay indebtedness, and working capital will be $28.0
million.
(3) These excess funds, as well as funds available to be borrowed
under the Credit Facility, will be available to EXCO to fund the
exploitation, development, exploration or acquisition of oil and
natural gas properties and for other general corporate purchases.
While EXCO regularly evaluates potential acquisition
opportunities, other than in respect of the Gladstone Merger and
the Dawson County Acquisition (see "Recent Developments --
Gladstone Merger" and "Recent Developments -- Dawson County
Acquisition"), EXCO does not have any agreements or understandings
with respect to any acquisition transaction. EXCO does not have
any budgeted amount for acquisitions.
(4) Represents estimated expenses attributable to the Rights Offering.
24
<PAGE> 27
CAPITALIZATION
The following table sets forth the capitalization of EXCO (assuming a
$6.00 per share Subscription Price and the exercise of all Rights offered hereby
for the purposes of this table) (i) on a historical basis as of March 31, 1998,
(ii) on a pro forma basis to give effect to the Jacobi-Johnson Acquisition, the
Dawson County Acquisition and the Gladstone Merger, and (iii) on a pro forma
basis as adjusted to give effect to the sale of 5,943,360 shares of Common Stock
in the Rights Offering and the application of the net proceeds therefrom as if
such transactions had occurred on March 31, 1998. See "Use of Proceeds,"
"Unaudited Pro Forma Condensed Financial Statements" and notes thereto and
EXCO's historical Financial Statements and notes thereto appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------------------------------
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
------------ -------------- -------------
(In thousands)
<S> <C> <C> <C>
Long-term debt, including current maturities (1).......................... $ 627 $ 6,811 $ --
Stockholders' equity:
Common Stock, $.02 par value; 25,000,000 shares authorized;
508,900 shares issued and outstanding; 594,336 shares pro forma;
6,537,696 shares pro forma as adjusted (2)............................. 10 12 131
Additional paid-in capital................................................. 954 1,465 36,844
Retained earnings ......................................................... (194) (194) (194)
------------ -------------- -------------
Total stockholders' equity........................................ 770 1,283 36,781
------------ -------------- -------------
Total capitalization.............................................. $ 1,397 $ 8,094 $ 36,781
============ ============== =============
</TABLE>
- ------------------------------
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" for
additional information relating to the Credit Facility.
(2) Historical and pro forma information has been adjusted to give effect
to the Reverse Stock Split effected as of March 31, 1998. Excludes an
aggregate of 1,000,000 shares of Common Stock that are reserved for
issuance under EXCO's 1998 Stock Option Plan.
DILUTION
The net tangible book value of the Common Stock as of March 31, 1998,
was $770,000 or $1.51 per share. Net tangible book value per share represents
total tangible assets less total liabilities, divided by the number of shares of
Common Stock outstanding, on a fully diluted basis excluding stock options.
After giving effect to the consummation of the Rights Offering (assuming a $6.00
per share Subscription Price and the exercise of all Rights offered hereby for
the purposes of this table) and the application of the net proceeds therefrom,
the issuance of 85,436 shares of Common Stock at $6.00 per share for the
Jacobi-Johnson transaction closed on May 8, 1998, the net tangible book value of
EXCO as of March 31, 1998, would have been approximately $36,783,000, or $5.63
per share (before giving effect to the cash buy-back of fractional shares
pursuant to the Reverse Stock Split). This represents an immediate increase in
net tangible book value of $4.12 per share with respect to shares outstanding
prior to the Rights Offering and an immediate dilution of $.37 per share with
respect to shares purchased upon the exercise of Rights, as illustrated in the
following table:
<TABLE>
<CAPTION>
<S> <C>
Subscription Price.................................................................. $ 6.00
Net tangible book value per share at March 31, 1998............................... 1.51
Increase per share attributable to Rights Offering.................................. 4.49
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
<S> <C>
Pro forma net tangible book value per share after the consummation
of the Rights Offering and application of net proceeds therefrom.................. 5.63
Dilution per share purchased upon the exercise of Rights............................ .37(1)
</TABLE>
- ---------------------
(1) Does not take into account shares acquired or held other than
upon the exercise of Rights.
To the extent a shareholder sells or otherwise does not exercise such
shareholder's Rights, such shareholder's proportionate interest in EXCO's net
assets, earnings and voting power will be decreased. A shareholder selling
Rights may or may not be compensated for such dilution.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
TRADING PRICES
EXCO's Common Stock is currently quoted on the OTC under the symbol
"EXCO," but there is limited trading in the Common Stock. The following table
sets forth the high and low bid prices by calendar quarter from January 1, 1995
through June 30, 1998, based upon quotations periodically published on the OTC.
The price quotations below have been adjusted to estimate the effect of the
one-for-five reverse stock split of the Common Stock in the case of quotations
for periods prior to July 19, 1996, the effective date of the stock split.
Additionally, the price quotations below have been adjusted to estimate the
effect of the Reverse Stock Split of the Common Stock in the case of quotations
for periods prior to March 31, 1998, the effective date of the Reverse Stock
Split. All price quotations present prices between dealers, without retail
mark-ups, mark-downs or commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------
HIGH LOW
----------- -----------
<S> <C> <C>
1998
Second Quarter (through June 30, 1998)................. $ 7.50 $ 6.50
First Quarter.......................................... $ 7.00 $ 6.00
1997
Fourth Quarter......................................... $ 6.25 $ 5.50
Third Quarter.......................................... 5.75 5.50
Second Quarter......................................... 5.75 5.50
First Quarter.......................................... 7.00 5.50
1996
Fourth Quarter......................................... $ 5.50 $ 5.50
Third Quarter.......................................... 5.50 4.00
Second Quarter......................................... 5.00 3.12
First Quarter.......................................... 5.00 3.12
1995
Fourth Quarter......................................... $ 5.00 $ 3.12
Third Quarter.......................................... 5.00 2.50
Second Quarter......................................... 6.25 2.50
First Quarter.......................................... 6.25 3.75
</TABLE>
On June 30, there were 594,336 shares of Common Stock outstanding.
At such date, there were approximately 1,600 record holders of Common Stock.
26
<PAGE> 29
DIVIDEND POLICY
EXCO has never paid cash dividends on its Common Stock and does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
EXCO anticipates that any income generated in the foreseeable future will be
retained for the development and expansion of its business. The Credit Facility
prohibits EXCO from paying dividends on its Common Stock. Future dividend policy
is subject to the discretion of the Board and will depend upon a number of
factors, including future earnings, debt service, capital requirements,
restrictions in EXCO's Credit Facility, business conditions, the financial
condition of EXCO and other factors that the Board deems relevant.
27
<PAGE> 30
THE RIGHTS OFFERING
THE RIGHTS
EXCO is distributing transferable Rights to the record holders of its
outstanding Common Stock as of the Record Date, at no cost to such record
holders. EXCO will distribute ten Rights for each share of Common Stock held on
the Record Date. One Right will entitle the holder to purchase one share of
Common Stock. The Rights will be evidenced by transferable Subscription
Certificates.
No Subscription Certificate may be divided in such a way as to permit
the holder of such Certificate to receive a greater number of Rights than the
number to which such Subscription Certificate entitles its holder, except that a
depository, bank, trust company or securities broker or dealer holding shares of
Common Stock on the Record Date for more than one beneficial owner may, upon
proper showing to the Subscription Agent, exchange its Subscription Certificate
to obtain a Subscription Certificate for the number of Rights to which all such
beneficial owners in the aggregate would have been entitled had each been a
record holder of Common Stock on the Record Date.
SUBSCRIPTION PRIVILEGES
BASIC SUBSCRIPTION PRIVILEGE
Each Right will entitle the holder thereof to receive, upon payment of
the Subscription Price, one share of Common Stock. Certificates representing
shares of Common Stock purchased pursuant to the Basic Subscription Privilege
will be delivered to subscribers as soon as practicable after the Expiration
Date, irrespective of whether the Subscription Privilege is exercised
immediately prior to the Expiration Date or earlier.
OVERSUBSCRIPTION PRIVILEGE
Subject to the allocation described below, each Right also carries the
right to subscribe for additional Rights to acquire additional shares of Common
Stock at the Subscription Price not subscribed for through the exercise of the
Basic Subscription Privilege by other Rights holders (the "Excess Shares"). Only
Rights holders who exercise the Basic Subscription Privilege in full will be
entitled to exercise the Oversubscription Privilege.
In no event, however, may the holder oversubscribe for more than 100%
of the shares purchased by the holder in the Basic Subscription Privilege. If
the number of shares available taking into account the aforementioned
restrictions are not sufficient to satisfy the oversubscriptions, the available
shares will be allocated pro rata (subject to elimination of fractional shares)
among the holders of Rights who exercise the Oversubscription Privilege, in
proportion, not to the number of shares requested pursuant to the
Oversubscription Privilege, but to the number of shares each beneficial holder
has purchased pursuant to the Basic Subscription Privilege; provided, however,
that if such pro rata allocation results in any holder being allocated a greater
number of shares than such holder subscribed for pursuant to the exercise of
such holder's Oversubscription Privilege, then such holder will be allocated
only such number of shares as such holder subscribed for pursuant to the
Oversubscription Privilege and the remaining shares will be allocated among all
other holders exercising the Oversubscription Privilege.
Holders desiring to exercise their Oversubscription Privilege should
indicate in the space provided on their Subscription Certificate the number of
additional shares they would like to subscribe for. As soon as practicable
following the Expiration Date, EXCO will determine the number of shares of
Common Stock that may be purchased pursuant to the Oversubscription Privilege.
Holders must tender with their Subscription Certificate the full amount due on
exercise of their Oversubscription Privilege for that number of shares they have
so subscribed for (in addition to the payment due on the Basic Subscription
Privilege).
Certificates representing Excess Shares purchased pursuant to the
Oversubscription Privilege will be delivered to subscribers as soon as
practicable after the Expiration Date and after all prorations and adjustments
contemplated by the terms of the Rights Offering have been effected. EXCO will
also repay, without interest,
28
<PAGE> 31
subscribing holders for any overpayment on the amount determined to be due with
respect to such subscriber's Oversubscription Privilege.
Banks, brokers and other nominee holders of Rights who exercise the
Basic Subscription Privilege and the Oversubscription Privilege on behalf of
beneficial owners of Rights will be required to certify to the Subscription
Agent and EXCO, in connection with the exercise of the Oversubscription
Privilege, as to the aggregate number of Rights that have been exercised and the
number of shares of Common Stock that are being subscribed for pursuant to the
Oversubscription Privilege by each beneficial owner of Rights on whose behalf
such nominee holder is acting.
EXPIRATION DATE
The Rights will expire at 5:00 p.m., Dallas time, on ________, 1998,
unless extended by EXCO. After the Expiration Date, unexercised Rights will be
null and void. EXCO will not be obligated to honor any purported exercise of
Rights received by the Subscription Agent after the Expiration Date, regardless
of when the documents relating to such exercise were sent, except pursuant to
the Guaranteed Delivery Procedures described below.
DETERMINATION OF SUBSCRIPTION PRICE
The Subscription Price was determined by EXCO and its Board of
Directors. The Subscription Price was determined after considering such factors
as the price paid by Messrs. Miller, Eubank and Ellis for the purchase of their
shares in December 1997 after taking into account the Reverse Stock Split, the
current trading price for the Common Stock, future prospects of EXCO, the
industry in general and EXCO's position in the industry, market valuations of
the securities of companies engaged in similar activities, the quality of the
management team and negotiations with the Standby Purchasers. The Subscription
Price should not be considered an indication of the actual value of EXCO or its
Common Stock. There can be no assurance that the market price of the Common
Stock will not decline during the subscription period or that, following the
issuance of the Rights and of the Common Stock upon exercise of Rights, a
subscribing Rights holder will be able to sell shares of Common Stock purchased
in the Rights Offering at a price equal to or greater than the Subscription
Price.
At the time the Subscription Price for the Rights Offering was
determined, such price represented a ___% discount to the market price for
EXCO's Common Stock. The market price for EXCO's Common Stock is expected to
decrease by an amount that approximates the value of the Rights when the Rights
are distributed and begin to trade as a separate security.
EXERCISE OF RIGHTS
Rights may be exercised by delivery to the Subscription Agent, on or
prior to the Expiration Date, of the properly completed and duly executed
Subscription Certificate evidencing such Rights (together with any required
signature guarantees), accompanied by payment in full of the Subscription Price
for each share of Common Stock subscribed for pursuant to the Basic Subscription
Privilege and the Oversubscription Privilege (except as permitted pursuant to
clause (iii) of the next sentence). Such payment in full must be made by (i)
check or bank draft drawn upon a United States bank or a postal, telegraphic or
express money order payable to "Continental Stock Transfer, as Subscription
Agent"; or (ii) wire transfer of funds to the account maintained by the
Subscription Agent for such purpose at Chase Manhattan Account No. 777-009625,
ABA No. 021000021; or (iii) in such other manner as EXCO may approve in writing
in the case of persons acquiring an aggregate number of shares of Common Stock
totaling $1,500,000 or more, provided that in such case the full amount of such
Subscription Price is received by the Subscription Agent in currently available
funds within one OTC trading day prior to the Expiration Date (the payment
method under (iii) being an "Approved Payment Method"). Payment of the
Subscription Price will be deemed to have been received by the Subscription
Agent only upon (a) clearance of any uncertified check, (b) receipt by the
Subscription Agent of any certified check or bank draft drawn upon a U.S. bank
or of any postal, telegraphic or express money order, (c) receipt of good funds
in the Subscription Agent's account designated above or (d) receipt of funds by
the Subscription Agent through an Approved Payment Method. PLEASE NOTE THAT
FUNDS PAID BY UNCERTIFIED PERSONAL CHECK MAY TAKE AT LEAST FIVE BUSINESS DAYS TO
CLEAR. ACCORDINGLY, HOLDERS WHO WISH TO PAY THE SUBSCRIPTION PRICE BY MEANS OF
29
<PAGE> 32
UNCERTIFIED PERSONAL CHECK ARE URGED TO MAKE PAYMENT SUFFICIENTLY IN ADVANCE OF
THE EXPIRATION DATE TO ENSURE THAT SUCH PAYMENT IS RECEIVED AND CLEARS BY SUCH
DATE, AND ARE URGED TO CONSIDER PAYMENT BY MEANS OF CERTIFIED OR CASHIER'S
CHECK, MONEY ORDER OR WIRE TRANSFER OF FUNDS.
Subscription Certificates and payment of the Subscription Price should
be delivered to the address set forth below under "-- Subscription Agent."
If a Rights holder wishes to exercise Rights, but time will not permit
such holder to cause the Subscription Certificate(s) evidencing such Rights to
reach the Subscription Agent on or prior to the Expiration Date, such Rights may
nevertheless be exercised if all of the following conditions (the "Guaranteed
Delivery Procedures") are met:
(i) such holder has caused payment in full of the Subscription
Price for each share of Common Stock being subscribed for pursuant to
the Basic Subscription Privilege and the Oversubscription Privilege to
be received (in the manner set forth above) by the Subscription Agent
on or prior to the Expiration Date;
(ii) the Subscription Agent receives, on or prior to the
Expiration Date, a notice of guaranteed delivery (a "Notice of
Guaranteed Delivery"), substantially in the form provided with the
Instructions distributed with the Subscription Certificates, from a
member firm of a registered national securities exchange or a member of
the National Association of Securities Dealers, Inc., or a commercial
bank or trust company having an office or correspondent in the United
States, stating the name of the exercising Rights holder, the number of
Rights represented by the Subscription Certificate(s) held by such
exercising holder, the number of shares of Common Stock being
subscribed for pursuant to the Basic Subscription Privilege and the
number of shares, if any, being subscribed for pursuant to the
Oversubscription Privilege, and guaranteeing the delivery to the
Subscription Agent of any Subscription Certificate(s) evidencing such
Rights within three OTC trading days following the date of the Notice
of Guaranteed Delivery; and
(iii) the properly completed and duly executed Subscription
Certificate(s), including any required signature guarantees, evidencing
the Rights being exercised is received by the Subscription Agent within
three OTC trading days following the date of the Notice of Guaranteed
Delivery relating thereto. The Notice of Guaranteed Delivery may be
delivered to the Subscription Agent in the same manner as Subscription
Certificates at the addresses set forth below, or may be transmitted to
the Subscription Agent by facsimile transmission (facsimile no. (212)
509-5150). Additional copies of the form of Notice of Guaranteed
Delivery are available upon request from Continental Stock Transfer &
Trust Company.
Unless a Subscription Certificate (i) provides that the shares of
Common Stock to be issued pursuant to the exercise of Rights represented thereby
are to be delivered to the record holder of such Rights or (ii) is submitted for
the account of a member firm of a registered national securities exchange or a
member of the National Association of Securities Dealers, Inc., or a commercial
bank or trust company having an office or correspondent in the United States,
signatures on such Subscription Certificate must be guaranteed by an eligible
guarantor institution ("Eligible Guarantor Institution") as defined in Rule
17Ad-15 of the Exchange Act, subject to the standards and procedures adopted by
the Subscription Agent.
Funds received in payment of the Subscription Price for Excess Shares
subscribed for pursuant to the Oversubscription Privilege will be held in a
segregated account pending issuance of such Excess Shares. If a Rights holder
exercising the Oversubscription Privilege is allocated less than all of the
Excess Shares that such holder wished to subscribe for pursuant to the
Oversubscription Privilege, the excess funds paid by such holder in respect of
the Subscription Price for shares not issued will be returned by mail without
interest or deduction as soon as practicable after the Expiration Date.
A holder who holds shares of Common Stock for the account of others,
such as a broker, a trustee or a depositary for securities, should notify the
respective beneficial owners of such shares as soon as possible to ascertain
such beneficial owners' intentions and to obtain instructions with respect to
the Rights beneficially owned by them.
30
<PAGE> 33
Beneficial owners of Common Stock or Rights held through such a holder of record
should contact the holder and request the holder to effect transactions in
accordance with the beneficial owner's instructions.
If either the number of Rights being exercised is not specified on a
Subscription Certificate, or the payment delivered is not sufficient to pay the
full aggregate Subscription Price for all shares of Common Stock stated to be
subscribed for, the Rights holder will be deemed to have exercised the maximum
number of Rights that could be exercised for the amount of the payment delivered
by such Rights holder. If the payment delivered by the Rights holder exceeds the
aggregate Subscription Price for the number of Rights evidenced by the
Subscription Certificate(s) delivered by such Rights holder, the payment will be
applied, until depleted, to subscribe for shares of Common Stock in the
following order: (i) to subscribe for the number of shares, if any, of Common
Stock indicated on the Subscription Certificate(s) pursuant to the Basic
Subscription Privilege; (ii) to subscribe for shares of Common Stock until the
Basic Subscription Privilege has been fully exercised with respect to all of the
Rights represented by the Subscription Certificate; and (iii) to subscribe for
additional shares of Common Stock pursuant to the Oversubscription Privilege
(subject to any applicable proration). Any excess payment remaining after the
foregoing allocation will be returned to the Rights holder as soon as
practicable by mail, without interest or deduction.
The Instructions accompanying the Subscription Certificates should be
read carefully and followed in detail. DO NOT SEND SUBSCRIPTION CERTIFICATES TO
EXCO.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE ELECTION AND RISK OF
THE RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH CERTIFICATES
AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY TO
THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO THE EXPIRATION DATE.
BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO
CLEAR, RIGHTS HOLDERS ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY
MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR WIRE TRANSFER OF FUNDS.
All questions concerning the timeliness, validity, form and eligibility
of any exercise of Rights will be determined by EXCO, whose determinations will
be final and binding. EXCO, in its sole discretion, may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any Right by
reason of any defect or irregularity in such exercise. Subscriptions will not be
deemed to have been received or accepted until all irregularities have been
waived or cured within such time as EXCO determines in its sole discretion.
Neither EXCO nor the Subscription Agent will be under any duty to give
notification of any defect or irregularity in connection with the submission of
Subscription Certificates or incur any liability for failure to give such
notification.
Any questions or requests for assistance concerning the method of
exercising Rights or requests for additional copies of this Prospectus, the
Instructions or the Notice of Guaranteed Delivery should be directed to:
Continental Stock Transfer
Reorganization Department
2 Broadway, 19th Floor
New York, NY 10004
(212) 509-4000, ext. 226
31
<PAGE> 34
FOREIGN AND CERTAIN OTHER SHAREHOLDERS
Subscription Certificates will not be mailed to holders whose addresses
are outside the United States or who have an APO or FPO address, but will be
held by the Subscription Agent for their account. To exercise or sell Rights,
such holders must notify the Subscription Agent by completing an International
Holder Subscription Form, which will be delivered to such holders in lieu of a
Subscription Certificate, and sending it by mail to the Subscription Agent at
the address specified above. International Holder Subscription Forms must be
returned to the Subscription Agent at or prior to 11:00 a.m., Eastern time, on
the date that is four OTC trading days prior to the Expiration Date, at which
time (if no instructions have been received) the Rights represented thereby will
be sold, if feasible, by the Subscription Agent and the net proceeds, if any,
remitted to such holders. If the Rights can be sold by the Subscription Agent,
sales of such Rights will be deemed to have been effected at the weighted
average price received by the Subscription Agent on the day such Rights are
sold, less any applicable brokerage commissions, taxes and other expenses.
NO REVOCATION
AFTER A HOLDER OF RIGHTS HAS EXERCISED THE BASIC SUBSCRIPTION PRIVILEGE
OR THE OVERSUBSCRIPTION PRIVILEGE, SUCH EXERCISE MAY NOT BE REVOKED BY SUCH
RIGHTS HOLDER.
METHOD OF TRANSFERRING RIGHTS
Rights may be purchased or sold through usual investment channels,
including banks and brokers. It is anticipated that the Rights will be traded on
the OTC until the close of business on the last OTC trading day preceding the
Expiration Date.
The Rights evidenced by a single Subscription Certificate may be
transferred in whole by endorsing the Subscription Certificate for transfer in
accordance with the Instructions. A portion of the Rights evidenced by a single
Subscription Certificate (but not fractional Rights) may be transferred by
delivering to the Subscription Agent a Subscription Certificate properly
endorsed for transfer, with instructions to register such portion of the Rights
evidenced thereby in the name of the transferee (and to issue a new Subscription
Certificate to the transferee evidencing such transferred Rights). In such
event, a new Subscription Certificate evidencing the balance of the Rights will
be issued to the Rights holder or, if the holder so instructs, to an additional
transferee.
Rights holders wishing to transfer all or a portion of their Rights
(but not fractional Rights) should allow a sufficient amount of time prior to
the Expiration Date for (i) the transfer instructions to be received and
processed by the Subscription Agent, (ii) a new Subscription Certificate to be
issued and transmitted to the transferee or transferees with respect to
transferred Rights, and to the transferor with respect to retained Rights, if
any, and (iii) the Rights evidenced by such new Subscription Certificates to be
exercised or sold by the recipients thereof. Neither EXCO nor the Subscription
Agent shall have any liability to a transferee or transferor of Rights if
Subscription Certificates are not received in time for exercise or sale prior to
the Expiration Date.
Except for the fees charged by the Subscription Agent (which will be
paid by EXCO as described herein), all commissions, fees and other expenses
(including brokerage commissions and transfer taxes) incurred in connection with
the purchase, sale or exercise of Rights will be for the account of the
transferor of the Rights, and none of such commissions, fees or expenses will be
paid by EXCO or the Subscription Agent.
PROCEDURES FOR BOOK ENTRY TRANSFER FACILITY PARTICIPANTS
EXCO anticipates that the Rights will be eligible for transfer through,
and that the exercise of the Basic Subscription Privilege may be effected
through, the facilities of Depository Trust Company ("DTC"). Rights exercised
through DTC are referred to herein as "DTC Exercised Rights." The holder of a
DTC Exercised Right may exercise the Oversubscription Privilege in respect of
such DTC Exercised Right by properly executing and delivering to the
Subscription Agent on or prior to the Expiration Date, a DTC Participant
Oversubscription Exercise Form, together with payment of the appropriate
Subscription Price for the number of shares of Common Stock for which
32
<PAGE> 35
the Oversubscription Privilege is to be exercised. Copies of the DTC Participant
Oversubscription Exercise Form may be obtained from Continental Stock Transfer &
Trust Company.
SUBSCRIPTION AGENT
EXCO has appointed Continental Stock Transfer & Trust
Company as Subscription Agent for the Rights Offering. The Subscription Agent's
address, which is the address to which the Subscription Certificates and payment
of the Subscription Price should be delivered, as well as the address to which
Notice of Guaranteed Delivery must be delivered, is:
Continental Stock Transfer
Reorganization Department
2 Broadway, 19th Floor
New York, NY 10004
The Subscription Agent's telephone number is (212) 509-4000, ext. 226,
and its facsimile number is (212) 509-5150.
EXCO will pay the fees and expenses of the Subscription Agent (which
are estimated will aggregate $12,000), and has also agreed to indemnify the
Subscription Agent from any liability which it may incur in connection with the
Rights Offering.
STANDBY PURCHASE AGREEMENTS
EXCO and each of the Standby Purchasers have entered into Standby
Purchase Agreements, pursuant to which the Standby Purchasers have agreed to
purchase at the Subscription Price a number of shares of Common Stock equal to
the number of shares of Common Stock not purchased pursuant to the exercise of
Rights. The Ares Standby Purchase Agreement provides that Ares will purchase a
minimum of 1,000,000 shares and up to a maximum of 2,000,000 shares. Are's
obligation to purchase any shares of Common Stock is conditioned upon holders of
Rights exercising Rights to purchase at least 3,000,000 shares of Common Stock,
including 250,000 shares which must be purchased by Mr. Miller. The Oaktree
Standby Purchase Agreement provides that Oaktree will purchase a minimum of
1,000,000 shares provided 2,000,000 shares are purchased pursuant to the Rights
Offering including 250,000 shares of which must be purchased by Mr. Miller and
provided Ares has purchased at least 1,000,000 shares pursuant to the Ares
Standby Purchase Agreement. Mr. Miller has stated to EXCO that he intends to
purchase at least 250,000 shares pursuant to the exercise of Rights issued to
him. The Standby Purchasers have agreed to acquire the shares of Common Stock at
a price per share equal to the Subscription Price. If the Standby Purchasers
decline to purchase the shares of Common Stock because of EXCO's failure to
satisfy the threshold sales requirements, then EXCO is required to reimburse the
Standby Purchasers for reasonable fees and expenses in connection with the
proposed purchase.
Pursuant to the obligations of the Standby Purchase Agreements, the
Standby Purchasers each warrant to EXCO that they are purchasing the shares of
Common Stock for their own account and without any intent to sell or transfer
the shares in violation of the Securities Act. Pursuant to the obligations of
the Standby Purchase Agreements, EXCO makes certain representations to the
Standby Purchasers as to EXCO's timely filing of accurate documents with the
Commission, the valid issuance of EXCO's Common Stock, the enforceability of the
Standby Purchase Agreements, the current capitalization of EXCO, and that EXCO
is duly incorporated and in good standing in Texas. In addition to the
conditions described above, the rights and obligations of EXCO and the Standby
Purchasers are subject to certain customary conditions, including the absence of
any pending or threatened action, suit or proceeding relating to the Rights
Offering or the Standby Purchase Agreements. EXCO has also agreed to expand its
Board of Directors to add one new director to be nominated by Ares and one new
director to be nominated by Oaktree.
33
<PAGE> 36
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table presents selected historical financial data for
EXCO. The financial data should be read in conjunction with EXCO's financial
statements, the notes thereto and the other financial information, including pro
forma information, included elsewhere herein. In the opinion of management of
EXCO, the data presented reflect all adjustments considered necessary for a fair
presentation of the results for such periods. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of EXCO" and the other
financial information included elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTH
TRANSITION
FISCAL YEAR ENDED PERIOD ENDED FISCAL YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31, THREE MONTHS ENDED MARCH 31,
----------------- ------------ ----------------------------- ---------------------------
PRO FORMA PRO FORMA
1994(1) 1995(1) 1995(1) 1996(1) 1997 1997(5) 1997 1998 1998(5)
------- ------ ------------ ------- ------- --------- ------ ------ ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and natural gas.............. $ 715 $ 626 $ 560 $ 872 $ 670 $ 3,078 $ 219 $ 173 $ 674
Other............................ 127 105 76 39 28 86 11 10 12
------- ------ ------------ ------- ------- --------- ------ ------ --------
Total revenues................ 842 731 636 911 698 3,164 230 183 686
Costs and expenses:
Oil and natural gas production... 459 403 333 429 322 1,254 99 95 282
General and administrative....... 208 371 366 373 486 531 106 239 260
Depreciation, depletion and
amortization.................... 80 81 92 114 84 567 28 36 183
Interest expenses................ 5 4 5 18 11 507 5 7 156
Other (2)........................ -- -- -- 303 -- -- -- -- --
------- ------ ------------ ------- ------- --------- ------ ------ --------
Total expenses................ 752 859 796 1,237 903 2,859 238 377 881
------- ------ ------------ ------- ------- --------- ------ ------ --------
Income (loss) before income taxes. 90 (128) (160) (326) (205) 305 (8) (194) (195)
Income taxes...................... -- -- -- -- -- 104 -- -- --
------- ------ ------------ ------- ------- --------- ------ ------ --------
Net income (loss)................. $ 90 $ (128) $ (160) $ (326) $ (205) $ 201 $ (8) $ (194) $ (195)
======= ====== ============ ======= ======= ========= ====== ====== ========
Net income (loss) per share(3)(4). $ 0.31 $ (.39) $ (.47) $ (.85) $ (.51) $ .41 $ (.02) $ (.38) $ (.33)
======= ====== ============ ======= ======= ========= ====== ====== ========
Weighted average common and
common equivalent shares
outstanding (3)................. 293 328 338 38 403 488 403 509 594
======= ====== ============ ======= ======= ========= ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31, 1998
--------------------- ------------------------------ --------------------
PRO
1994 1995 1995 1996 1997 ACTUAL FORMA(5)
---------- --------- -------- ---------- --------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets....................... $ 456 $ 577 $582 $ 373 $ 727 $ 256 $ 980
Oil and natural gas properties, net.. 669 785 820 749 473 1,275 7,716
Total assets......................... 1,210 1,439 1,511 1,226 1,270 1,754 8,696
Current liabilities.................. 418 653 861 658 328 372 617
Long-term debt....................... 19 16 40 36 15 612 6,796
Stockholders' equity................. 773 770 610 532 927 770 1,283
</TABLE>
(1) The data for all prior years has been restated to reflect the change in
EXCO's method of accounting for oil and natural gas operations to the
full cost method of accounting. See Note 2 to EXCO's Financial
Statements. As a result of the change in the accounting method, net
income has been increased by $44,000 ($0.15 per share) for the year ended
March 31, 1994; the net loss for the year ended March 31, 1995, the nine
month period ended December 31, 1995 and the year ended December 31,
1996, has been decreased $40,000 ($0.12 per share), $184,000 ($0.54 per
share) and $3,000 ($0.01 per share), respectively.
(2) The $303,000 expense in fiscal 1996 represents the legal, accounting
and other expenses associated with the attempted acquisition by EXCO of
Taurus Energy Corp.
(3) Per share data has been restated to reflect the one-for-five reverse
stock split effective July 19, 1996 and the Reverse Stock Split effective
March 31, 1998. The adoption of Financial Accounting Standards Board No.
128, Earnings per Share, did not have a material impact on net income
(loss) per share amounts reported herein.
(4) EXCO has not declared nor paid any dividends during any of the periods
presented.
(5) See "Pro Forma Combined Condensed Financial Statements" included
elsewhere in this Prospectus for a discussion of the preparation of this
data.
34
<PAGE> 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Revenues. EXCO's oil and natural gas revenues for the three month
period ended March 31, 1998 decreased $46,000, or 21%, to $173,000 versus
$219,000 for the corresponding period of 1997. The decrease in revenues was
primarily due to lower oil and gas prices in the current quarter and the fact
that revenues from newly acquired properties were partially offset by the
absence of revenue from properties that were sold after the first quarter of the
prior year.
EXCO sold 2,816 Bbls of crude oil during the quarter ended March
31, 1998 versus 4,972 Bbls in the corresponding quarter of 1997, a 43% decrease.
EXCO sold 72,525 Mcf of natural gas during the current quarter versus
43,120 Mcf in the first quarter of 1997, a 68% increase. The decrease in oil
volume was attributable to the sale in mid-1997 of several non-strategic oil
properties. The increase in gas volume was due to the acquisition of the
Maverick County properties effective January 1, 1998.
The average oil price received during the three months ended March 31,
1998 was $13.66 versus $21.50 for the three months ended March 31, 1997, a $7.84
per barrel or 36% decrease. The average gas price received during the current
quarter was $1.86 versus $2.60 for the corresponding quarter of the prior year,
a $0.74 per Mcf or 28% decrease.
Costs and Expenses. Costs and expenses for the three month period ended
March 31, 1998 increased by $139,000, or 58%, to $377,000 as compared to
$238,000 for the corresponding period of 1997. This was primarily due to a
$133,000 increase in general and administrative costs in the current quarter.
This increase reflects EXCO's increased staffing and new focus on reserve
acquisitions. Other variances between the costs and expenses for the first
quarters of 1998 and 1997 are minimal.
Net Income (Loss). EXCO had a net loss for the quarter ended March 31,
1998 of $194,000 compared to a net loss of $8,000 for the corresponding quarter
of 1997, representing $(.38) and $(.02) per share, respectively. Earnings per
share figures are based on restated weighted average shares outstanding after
the retroactive effect of the Reverse Stock Split approved at the EXCO's
shareholders' meeting held on March 31, 1998.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1997
Revenues. Oil and natural gas revenues decreased $202,000, or 23%, to
$670,000 for the fiscal year ended December 31, 1997 from $872,000 for the
fiscal year ended December 31, 1996. The decrease was due primarily to the sale
during 1997 of certain non-strategic oil and natural gas properties which lead
to decreased production volumes. Oil and natural gas prices for 1997 were 4%
lower and 14% higher, respectively, than such prices in 1996. Oil and natural
gas sales volumes for 1997 decreased 35% and 19%, respectively, from 1996 as a
result of property sales and the continued depletion of existing properties.
Other income for the fiscal year ended December 31, 1997 was $28,000 as
compared to $39,000 for the fiscal year ended December 31, 1996. This income
primarily includes well supervision fees and interest income. Prior years have
been restated to reflect a change in classification of fees from overhead
charges billed to working interest owners, including EXCO. These overhead
charges have previously been recorded as management fee revenue and are now
recorded as a reduction in general and administrative expenses.
Costs and Expenses. EXCO's costs and expenses decreased $334,000, or
27%, to $903,000 for the fiscal year ended December 31, 1997 from $1,237,000 for
the fiscal year ended December 31, 1996. This decrease was due primarily to
expenses of $303,000 incurred in 1996 in connection with EXCO's attempted
acquisition of Taurus Energy Corp. Oil and natural gas production costs
decreased $107,000 to $322,000 for 1997 from $429,000 in 1996
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<PAGE> 38
as a result of the property sales, and general and administrative expenses
increased $113,000 to $486,000 in 1997 from $373,000 in 1996 due to various
increases in office expenses and a reduction in billed salary reimbursement as a
result of the disposition of a certain oil property.
In 1997, EXCO changed its method of accounting for oil and natural gas
properties from successful efforts to the full cost method of accounting. Prior
years have been restated to reflect this change in accounting method as though
EXCO had been using the full cost method for all periods being compared.
Effective December 31, 1997, EXCO effected a quasi-reorganization through the
application of $8,799,000 of its additional paid-in capital account to eliminate
its accumulated deficit.
Net Income (Loss). Net loss for the fiscal year ended December 31, 1997
was $205,000, or $.51 per share, compared to a loss of $326,000, or $.85 per
share, for the fiscal year ended December 31, 1996. This $121,000 decrease was
primarily the result of a decrease in revenues being partially offset by a
decrease in expenses as more fully described above.
COMPARISON OF NINE MONTH TRANSITION PERIOD ENDED DECEMBER 31, 1995 AND
THE FISCAL YEAR ENDED DECEMBER 31, 1996
Comparative Periods. On February 13, 1996, EXCO changed its fiscal year
end from March 31 to December 31. As a result, the following comparison is
between the fiscal year ended December 31, 1996 and the nine month transition
period ended December 31, 1995.
Revenues. Oil and natural gas revenues increased $312,000, or 56%, to
$872,000 for the fiscal year ended December 31, 1996 from $560,000 for the nine
month transition period ended December 31, 1995. The increase in oil and natural
gas revenues was primarily attributable to higher oil and natural gas prices in
fiscal 1996 as well as increased production volumes. Oil and natural gas prices
for the fiscal year ended December 31, 1996, were 24% higher and 34% higher,
respectively, than such prices in the nine month transition period ended
December 31, 1995. Oil and natural gas production for the fiscal year ended
December 31, 1996, increased 16% and 24%, respectively, from the nine month
transition period ended December 31, 1995. These increases were primarily
attributable to the production from several successful workovers and newly
completed wells overshadowing the continued depletion of existing properties.
Management fees and other income decreased $37,000, or 49%, to $39,000
for the fiscal year ended December 31, 1996 from $76,000 in the nine month
transition period ended December 31, 1995. Management fees and other income
primarily include well supervision fees and interest income. The decrease was
due primarily to a lower level of operated drilling and maintenance activities.
Costs and Expenses. EXCO's costs and expenses increased $441,000, or
55%,to $1,237,000 for the fiscal year ended December 31, 1996 from $796,000 for
the nine month transition period ended December 31, 1995. This increase was due
primarily to the costs, including financing and acquisition costs, incurred in
connection with the abandonment of EXCO's proposed acquisition of Taurus Energy
Corp.
Net Income (Loss). Net loss for the fiscal year ended December 31, 1996
was $326,000, or $.85 per share, compared to a loss of $160,000, or $.47 per
share, for the nine month transition period ended December 31, 1995. This
$166,000 decrease was primarily the result of an increase in revenues being
partially offset by an increase in expenses as more fully described above.
QUASI-REORGANIZATION
Effective December 31, 1997, EXCO effected a quasi-reorganization
through the application of $8,799,000 of its additional paid-in capital account
to eliminate its accumulated deficit. EXCO's Board of Directors decided to
effect a quasi-reorganization given the change in management in December 1997,
the infusion of new equity capital in December 1997 and an expected increase in
acquisition, exploitation and development activities. Based on these factors and
establishment of a strategic growth plan, EXCO's Board of Directors and
management believed that the reflection of prior losses on EXCO's balance sheet
would not be meaningful in presenting the financial position
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<PAGE> 39
of EXCO. EXCO's accumulated deficit was primarily related to past operations and
properties that have been disposed of; the accumulated deficit was not, in
management's view, reflective of EXCO's current financial condition. The
historical carrying values of EXCO's assets and liabilities were not adjusted
in connection with the quasi-reorganization.
CHANGE IN METHOD OF ACCOUNTING FOR OIL AND NATURAL GAS OPERATIONS
In the fourth quarter of 1997, EXCO changed from the successful efforts
method to the full cost method of accounting for its oil and natural gas
operations. All prior year's financial statements presented herein have been
restated to reflect the change.
During the past ten years, EXCO has incurred minimal exploration and
acquisition costs, has liquidated substantially all its properties and completed
"out of court" debt restructurings. Recently there was a change in control of
ownership of EXCO and new management was appointed. New management views EXCO as
a new company and believes the past operations are insignificant and not
relevant to EXCO's future plans.
New management believes that the change in accounting for oil and
natural gas properties is to a preferable method because the full cost method
will more appropriately reflect EXCO's future operations which will result from
the significant management changes at EXCO. Further, new management does not
believe that the use of the successful efforts method of accounting is
appropriate for a small to medium size acquisition, development and exploitation
company.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
EXCO's working capital on March 31, 1998 was a negative $116,000
compared to a positive $399,000 on December 31, 1997. This $515,000 decrease in
working capital resulted primarily from the purchase of the Maverick County
Properties and an increase in general and administrative expenses. EXCO's
working capital on December 31, 1997 was $399,000 compared to a negative
$285,000 on December 31, 1996. This $684,000 increase in working capital
resulted primarily from the sale of Common Stock to two individuals in 1997 for
net proceeds of $600,000. In addition, EXCO sold certain non-strategic oil and
natural gas properties in 1997 in order to generate working capital. EXCO's
working capital on December 31, 1996 was a negative $285,000 compared to a
negative $279,000 on December 31, 1995. This $6,000 decrease in working capital
resulted from the utilization of EXCO funds for the costs associated with the
attempted acquisition of Taurus Energy Corp. being partially offset by the
capital received upon the exercise of a stock option to purchase 120,000 shares
of Common Stock by a director of EXCO during the first quarter of 1996. The
option exercise resulted in $225,000 in cash for EXCO. This addition to working
capital was utilized primarily to pay off EXCO's short-term note payable in the
second quarter of 1996.
EXCO estimates that, on a pro forma basis, capital expenditures of
approximately $1,150,000 for drilling and recompletions may be necessary to
bring the nonproducing reserves, to proved developed producing status. The costs
may change due to adjustments to the completion plans and inflation. If these
reserves are not developed, future cash flows may be negatively impacted,
resulting in a reduction in working capital and liquidity. No contractual
obligations exist that require EXCO to make any of these capital expenditures.
EXCO expects to use cash available from working capital or borrowings under the
Credit Facility to fund such expenditures if and when made.
LONG-TERM DEBT
On March 31, 1998, EXCO had long-term debt (excluding current
maturities) of $612,000. EXCO's $150,000 note payable on December 31, 1996 was
paid in full in the second quarter of 1997 through the proceeds received from
the sale of an oil and natural gas property. This note payable amount had been
borrowed from a bank to fund the costs associated with the attempted acquisition
of Taurus Energy Corp.
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<PAGE> 40
SALE OF EQUITY
On December 31, 1997, Messrs. Eubank and Ellis purchased 200,000 shares
(100,000 shares each) of EXCO's Common Stock, par value $.01 per share, for
$3.00 per share, thus generating $600,000 in cash for EXCO. These proceeds were
primarily used for working capital and general corporate purposes.
NEW CREDIT FACILITY
On February 11, 1998, EXCO entered into the Credit Facility. The Credit
Facility provides for borrowings up to $50 million, subject to borrowing base
limitations.
The Credit Facility consists of a regular revolver which on June 30,
1998, had a borrowing base of $6.7 million. As of June 30, 1998, approximately
$680,000 was available to be borrowed under the Credit Facility. A portion of
the borrowing base is available for the issuance of letters of credit. All
borrowings under the Credit Facility are secured by a first lien deed of trust
providing a security interest in tangible and intangible assets representing at
least 90% of the assessed present value of EXCO's oil and natural gas
properties.
The Credit Facility provides that if EXCO's aggregate outstanding
indebtedness is less than $5,000,000, advances will bear interest at 1.5% over
the appropriate LIBOR rate. If the aggregate outstanding indebtedness is
greater than $5,000,000, then advances will bear interest at 1.0% over LIBOR if
the borrowing base usage is less than 50%, 1.25% over LIBOR if the borrowing
base usage is between 50-70%, 1.5% over LIBOR if the borrowing base usage is
between 70-90%, and 1.75% over LIBOR if the borrowing base usage exceeds 90%.
Currently, EXCO's interest rate under the Credit Facility is 7.2% per annum.
The Credit Facility also permits EXCO to repay and reborrow amounts under the
Credit Facility without any penalty, thereby allowing EXCO the flexibility to
utilize any available cash to reduce its outstanding indebtedness and thus, its
costs of borrowed funds.
Under the terms of the Credit Facility, EXCO must not permit its
Current Ratio (as defined) of Consolidated Current Assets (as defined) to its
Consolidated Current Liabilities (as defined) to be less than 1.0 to 1.0 at any
time. Furthermore, EXCO must not permit its Consolidated Tangible Net Worth (as
defined) to be less than $500,000 at any time between February 11, 1998 and
March 31, 1999. In addition, by March 31, 1999, EXCO's Consolidated Tangible Net
Worth must increase by 50% of EXCO's Consolidated Net Income (as defined) for
the fiscal quarter then ended and for every fiscal quarter thereafter must
increase by 50% of EXCO's Consolidated Net Income for the fiscal quarter then
ended. On December 31, 1997, if the Credit Facility had been outstanding at that
time, EXCO would have been in compliance with both the Current Ratio and the
Consolidated Tangible Net Worth covenants. On March 31, 1998, EXCO was in
compliance with the Consolidated Tangible Net Worth covenant, but was not in
compliance with the Current Ratio covenant. On May 15, 1998, NationsBank waived
EXCO's noncompliance with the Current Ratio at March 31, 1998. On May 15, 1998,
EXCO was in compliance with both the Current Ratio and the Consolidated Tangible
Net Worth covenants. EXCO believes, but cannot assure, that it will be able to
comply with all restrictive covenants in the future. In the future, if EXCO
fails to comply with a restrictive covenant and fails to acquire a waiver, then
NationsBank, of Texas, N.A. or a successor entity may declare an event of
default has occurred and call the notes immediately due and payable to the
extent and debt remains outstanding under the Credit Facility. EXCO may be
unable to repay all then-outstanding indebtedness in which case the lenders
could proceed to foreclose on all collateral securing the Credit Facility and
pursue such other remedies as may be available to the lenders. However, EXCO
intends to repay all outstanding indebtedness under the Credit Facility with
proceeds from the Rights Offering.
No principal amortization shall be required during the Credit Facility
period as long as the aggregate principal balance does not exceed the borrowing
base then in effect. However, if a borrowing base deficiency exists after giving
effect to the redetermination, then EXCO must either (a) eliminate such
borrowing base deficiency by making a single mandatory prepayment of principal
on the revolving loan in an amount equal to the entire amount of such borrowing
base deficiency on the first monthly date following the date on which such
borrowing base deficiency is determined to exist, (b) eliminate such deficiency
by making 6 consecutive mandatory prepayments of principal on the revolving loan
each of which shall be in the amount of one sixth (1/6th) of the amount of such
borrowing base deficiency commencing on the first monthly date following the
date on which such borrowing base deficiency is determined to exist and
continuing on each monthly date thereafter, or (c) eliminate such borrowing base
deficiency by submitting additional mineral interests to banks on the first
monthly date following the date on which such borrowing base deficiency is
determined to exist for evaluation as borrowing base properties which banks, in
their sole discretion, determine have a value sufficient to increase the
borrowing base by at least the amount of the borrowing base deficiency. If by
the first scheduled borrowing base redetermination EXCO has not realized a
minimum of $10.0 million in additional cash equity, then, beginning July 20,
1998 and on the twentieth day of each
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month thereafter, EXCO will be required to amortize the then outstanding debt
balance by applying 75% of the previous month's net revenues to the Credit
Facility. The Credit Facility matures on February 11, 2000.
EXCO's next borrowing base redetermination is scheduled for no later
than July 1, 1998, and semi-annually thereafter. EXCO may seek additional
borrowing capacity at that time for its acquisition and exploitation strategy.
However, there is no assurance that the current strategy will result in
increased collateral values or that such values will enable EXCO to borrow the
funds needed to continue the strategy.
The Credit Facility contains a number of covenants affecting EXCO's
liquidity and capital resources, including restrictions on EXCO's ability to
incur indebtedness at any time in an amount exceeding $100,000 or to pledge
assets outside of the Credit Facility, EXCO's maintenance of a minimum net worth
and restrictions on the payment of dividends on EXCO's capital stock.
NEED TO RAISE ADDITIONAL CAPITAL
The growth of EXCO's business will require substantial capital on a
continuing basis. There is no assurance that any such required additional funds
would be available on satisfactory terms and conditions, if at all. There is
also no assurance that EXCO will not pursue, from time to time, opportunities to
acquire oil and natural gas properties and businesses that may utilize the
capital currently expected to be available for its present operations. The
amount and timing of EXCO's future capital requirements, if any, will depend
upon a number of factors, including drilling costs, transportation costs,
equipment costs, marketing expenses, staffing levels and competitive conditions,
and any purchases or dispositions of assets, many of which are not within EXCO's
control. Failure to obtain any required additional financing could materially
affect the growth, cash flow and earnings of EXCO. In addition, EXCO's pursuit
of additional capital could result in the incurrence of additional debt or
potentially dilutive issuances of additional equity securities.
INFLATION AND CHANGING PRICES
The impact of inflation, as always, is difficult to assess. In 1997 and
through the first quarter of 1998, EXCO has experienced a weakness in prices
received for its oil and natural gas production. EXCO cannot anticipate whether
the present level of inflation will remain, however, a sudden increase in
inflation and/or an increase in operating costs or drilling costs coupled with a
continuation of low oil prices could have an adverse effect on the operations of
EXCO.
YEAR 2000 COMPLIANCE
EXCO's management has conducted a review of its information systems and
related data-processing activities to assess its exposure to the Year 2000
issue. As a result, EXCO recently purchased an oil and natural gas based
software system which is Year 2000 compliant. The Year 2000 compliant version of
this software is in use at other oil and natural gas companies currently. EXCO
expects this software to be installed and operational on or before July 15,
1998.
EXCO currently uses Year 2000 compliant engineering evaluation software
for acquisition analysis, as well as internal engineering applications. EXCO's
spreadsheet and word processing software is also Year 2000 compliant.
EXCO has potential Year 2000 exposure with regard to its third party
relationships and services including its bank and bank accounts, payroll
processing which is outsourced and other vendor and/or service providers who
utilize computers. Though EXCO has no control over Year 2000 compliance
implementation by these parties, EXCO has inquired and been assured that all of
EXCO's service providers are currently or will be Year 2000 compliant.
EXCO does not currently anticipate that it will incur material
expenditures, if any at all, to complete modifications for the Year 2000.
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BUSINESS AND PROPERTIES
GENERAL
EXCO is an independent oil and natural gas company that has been
engaged in the oil and natural gas business since 1955. EXCO's activities are
currently conducted primarily in Texas and Louisiana. Due to limited capital
resources and cash flow, in recent years EXCO's business activity has decreased.
At December 31, 1997, EXCO had 779,150 Boe of proved reserves, 93% of which were
natural gas, and owned leasehold interests in a total of 15,788 gross (3,744
net) acres of oil and natural gas properties, 49% of gross acres (75% net) which
were developed acres. EXCO held interests in 47 gross (9.76 net) wells at
December 31, 1997. On a pro forma basis at December 31, 1997, EXCO had an
interest in 176 gross (49.0 net) wells and had estimated proved reserves of
2,268,100 Boe with an estimated SEC PV-10 of $13.1 million ($12.2 million
Standardized Measure). Approximately 70% of these reserves were classified as
proved developed producing reserves. On a pro forma basis at December 31, 1997,
EXCO's Proved Reserves had an estimated reserve life of 13.3 years and were 62%
natural gas. EXCO currently serves as operator for approximately 77 wells. See
"--Oil and Natural Gas Reserves" and "--Acreage."
On December 19, 1997, Mr. Miller acquired 413,423 (approximately 51%)
of EXCO's outstanding shares of Common Stock at $3.00 per share, from various
holders, including certain current and former officers and directors of EXCO. At
that time, three of EXCO's five directors resigned and Mr. Miller and Mr. Eubank
were elected to the Board of Directors. In addition, Mr. Miller was elected
Chairman of the Board and Chief Executive Officer and Mr. Eubank was elected
President, Treasurer and Chief Financial Officer. On December 31, 1997, Mr.
Eubank and Mr. Ellis each acquired from EXCO 100,000 shares of Common Stock at
$3.00 per share. Also, on December 31, 1997, Mr. Eubank resigned as Chief
Financial Officer and Dr. Ramsey was appointed Chief Financial Officer of EXCO.
Mr. Miller was formerly Chairman of the Board and Chief Executive Officer of
Coda. Mr. Eubank was formerly President and a director of Coda and Mr. Ellis was
formerly a director of Coda. Dr. Ramsey was formerly Financial Planning Manager.
With the proceeds of the Rights Offering and the Credit Facility, the new
management team intends to commence an aggressive acquisition, development and
exploitation program. In executing this strategy, EXCO will focus on producing
properties with enhancement opportunities from activities such as infill
drilling, recompletions, repairs and equipment changes. EXCO will seek
properties it can operate, thus maintaining the maximum control of enhancement
activities. EXCO intends to generate drilling prospects internally and acquire
prospects from independent geologists and geophysicists and other oil and
natural gas operators.
BUSINESS STRATEGY
Following the Rights Offering, EXCO's business strategy will be to
enhance shareholder value through increases in revenues, earnings and operating
cash flow achieved through expansion and diversification of its energy
operations. EXCO intends to pursue a strategy of asset, revenue and cash flow
growth through acquisitions and development and exploitation of proved oil and
natural gas properties. EXCO believes there are numerous opportunities to
acquire additional energy assets and to enhance the value of such assets. EXCO's
current management successfully executed this strategy while at Coda. EXCO will
pursue its strategy of asset, revenue and cash flow growth in the following
primary areas:
o Growth. Achieve asset, revenue and cash flow growth as a
result of the acquisition and further development of other
producing oil and natural gas properties. EXCO believes there
are numerous opportunities to acquire additional energy assets
and to enhance the value of such assets through improved
operating practices and by aggressively developing reserve
potential.
o Acquire and Enhance Producing Oil and Natural Gas Properties.
Take advantage of opportunities that currently exist in the
United States to acquire producing oil and natural gas
properties. EXCO plans to continue to focus its acquisition
activities onshore in Texas, New Mexico, Oklahoma and
Louisiana to complement its existing properties and
operations; however, EXCO plans to review potential
acquisitions in other geographical regions of the United
States if
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they represent a significant concentration of energy-related
assets. EXCO will target producing properties that management
believes have additional development and exploitation
potential.
o Emphasize Exploitation and Development Activities. Exploit its
existing oil and natural gas properties and conduct
development evaluation and drilling on its existing and future
oil and natural gas properties. EXCO intends to concentrate on
enhancement opportunities from activities such as infill
drilling, recompletions, repairs and equipment changes. EXCO
may participate, from time to time, in a limited number of
exploratory wells.
o Corporate Efficiencies. Develop and operate a larger asset
base with less than proportionate increases in its overhead,
which will enable EXCO to achieve and maintain a competitive
cost structure.
o Capital Management. Maintain financial strength and
flexibility to position itself to pursue opportunities for
business expansion and acquisitions and to permit EXCO to
adapt to down cycles in the energy industry. EXCO believes
that effective management of its debt and equity are key to
achieving this objective.
o Technology. Increase its exploitation efforts, focusing on
established geological trends where EXCO can employ
geological, geophysical and engineering expertise. EXCO is
considering the application of 3-D seismic and advanced
drilling technologies where cost-effective and appropriate.
EXPLOITATION AND DEVELOPMENT ACTIVITIES
Historically, EXCO has financed its exploitation and development
expenditures primarily through cash flow from operations, bank borrowings,
equity capital from private sales of stock and promoted funds from industry
partners. With respect to its acquisition activities, EXCO intends to shift its
emphasis to larger scale acquisitions of producing properties with additional
development and exploitation potential. Initially, EXCO plans to use a
combination of debt and equity financing to fund these larger acquisitions.
EXCO made exploitation and development expenditures of $108,000,
$17,000 and $74,000 during the nine month transition period ended December 31,
1995, the fiscal year ended December 31, 1996 and the fiscal year ended December
31, 1997, respectively. EXCO made net lease acquisition expenditures of $4,000,
$1,000 and $2,000 during the nine month transition period ended December 31,
1995, the fiscal year ended December 31, 1996 and the fiscal year ended December
31, 1997, respectively. EXCO's ability to continue to fund its exploitation and
development activities depends upon cash flow and its ability to secure the
necessary financing for such activities.
OPERATING ACTIVITIES
Where possible, EXCO prefers to act as operator of the oil and natural
gas properties and prospects in which it owns an interest. The operator of an
oil and natural gas property supervises production, maintains production
records, employs field personnel and performs other functions required in the
production and administration of such property. The fees for such services
customarily vary from well to well, depending on the nature, depth and location
of the well being operated. Generally, the operator of an oil and natural gas
prospect is determined by such factors as the size of the working interest held
by a participant in the prospect, a participant's knowledge and experience in
the geological area in which the prospect is located and geographical
considerations. On December 31, 1997, EXCO was the operator of 24 gross (7.92
net) wells, which represented approximately 51.1% of the gross wells and 81.1%
of the net wells in which EXCO had an interest at such date. The remainder of
the wells in which EXCO had an interest at such date are operated by third party
operators. The wells that EXCO operates are located in Texas and Louisiana.
Although EXCO elects to operate and manage most of its properties and drilling
activities, its wells are drilled by independent drilling contractors.
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OIL AND NATURAL GAS PROPERTIES
The following table sets forth the fields in which EXCO has its
principal oil and natural gas properties, and certain information as of December
31, 1997 with respect to each of such fields.
<TABLE>
<CAPTION>
Fiscal Year Ended
December 31, 1997
Wells Proved Reserves Net Production
---------------- ----------------- -----------------
Percentage
of
Oil Gas Equivalent Oil Gas
Gross Net (Bbls) (Mcf) Reserves (Bbls) (Mcf)
------- ------- ------ --------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Logansport, Louisiana....... 2 .96 4,204 2,198,183 47.6% 211 26,316
Nine Mile Draw, Texas....... 1 .61 -- 1,714,619 36.7 -- 68,992
Southern Pine Field, Texas.. 1 .12 -- 152,453 3.3 -- 15,165
Other....................... 43 8.07 53,912 260,950 12.4 14,242 70,618
------- ------- ------ --------- ---------- ------ -------
Total.............. 47 9.76 58,116 4,326,205 100.0% 14,453 181,091
======= ======= ====== ========= ========== ====== =======
</TABLE>
LOGANSPORT FIELD
In 1995, EXCO acquired an additional 48% working interest in, and
became the operator of, an existing natural gas well (the "Acquired Well") in
the Logansport field located in DeSoto Parish, Louisiana. As a result of
acquisitions, EXCO owns a 51% working interest in the Acquired Well and related
acreage. The Logansport field produces from a series of low permeability
reservoirs with long life natural gas reserves. EXCO's reserves are produced in
the Hosston (Travis Peak) and Pettit formations from depths between 6,000 and
7,200 feet. The field is developed with 640 and 320 acre spacing, and wells in
the field are expected to have a production life exceeding 30 years.
NINE MILE DRAW FIELD
The Nine Mile Draw field is located in Reeves County, Texas, and
production is derived from a low permeability fractured limestone formation.
Presently, EXCO operates 1 gross (.61 net) well in the Fusselman formation,
which produces from depths between 13,700 and 14,400 feet and is estimated to
have a remaining reserve life of approximately 20 years.
SOUTHERN PINE FIELD
EXCO owns a nonoperated interest in 1 gross (.12 net) well in Cherokee
County, Texas. Production is derived from the Travis Peak formation, which has
estimated net reserves of approximately 152,453 Mcf of natural gas. Reserve
estimates indicate that as of December 31, 1997 the SEC PV-10 value attributable
to EXCO's interest was approximately $130,615.
TITLE TO PROPERTIES
As is common industry practice, little or no investigation of title is
made at the time of acquisition of undeveloped properties, other than a
preliminary review of local mineral records. Title investigations are made, and
in most cases, a title opinion of local counsel is obtained before commencement
of drilling operations. EXCO believes that the methods it utilizes for
investigating title prior to the acquisition of any properties are consistent
with practices customary in the oil and natural gas industry and that such
practices are adequately designed to enable EXCO to acquire good title to such
properties. Some title risks, however, cannot be avoided, despite the use of
customary industry practices.
EXCO's properties are generally subject to customary royalty and
overriding royalty interests, liens incident to operating agreements, liens for
current taxes and other burdens and minor encumbrances, easements and
restrictions, and may be mortgaged to secure indebtedness of EXCO. EXCO believes
that none of these burdens
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either materially detract from the value of such properties or materially
interfere with their use in the operation of EXCO's business. Substantially all
of EXCO's properties are pledged as collateral under the Credit Facility.
OIL AND NATURAL GAS RESERVES
All reserves are evaluated at contract temperature and pressure which
can affect the measurement of natural gas reserves. Operating costs, development
costs and certain production-related and ad valorem taxes were deducted in
arriving at the estimated future net cash flows. No provisions were made for
income taxes. The following estimates set forth reserves considered to be
economically recoverable under normal operating methods and existing conditions
at the prices and operating costs prevailing at the dates indicated above. The
estimates of the SEC PV-10 from future net cash flows differ from the
Standardized Measure of discounted future net cash flows set forth in the notes
to the Financial Statements of EXCO, which is calculated after provision for
future income taxes. There can be no assurance that these estimates are accurate
predictions of future net cash flows from oil and natural gas reserves or their
present value.
Proved reserves are estimates of oil and natural gas to be recovered in
the future. Reservoir engineering is a subjective process of estimating the
sizes of underground accumulations of oil and natural gas that cannot be
measured in an exact way. The accuracy of any reserve estimates is a function of
the quality of available data and of engineering and geological interpretation
and judgment. Reserve reports of other engineers might differ from the reports
contained herein. Results of drilling, testing and production subsequent to the
date of the estimate may justify revision of such estimate. Future prices
received for the sale of oil and natural gas may be different from those used in
preparing these reports. The amounts and timing of future operating and
development costs may also differ from those used. Accordingly, reserve
estimates are often different from the quantities of oil and natural gas that
are ultimately recovered. See "Risk Factors -- Uncertainty of Estimates of
Reserves and Future Net Cash Flows."
On December 31, 1997, EXCO's oil and natural gas reserves included
direct working interests in 47 wells in the states of Texas, Louisiana, North
Dakota, Kansas and Oklahoma, as well as overriding royalties in an additional
nine wells in Texas. EXCO has no reserves offshore or outside of the United
States. On December 31, 1997, approximately 61% of the present value of the
estimated future net revenues attributable to EXCO's properties were
attributable to proved developed reserves and approximately 39% was attributable
to proved undeveloped reserves. In addition, approximately 7.5% of the proved
reserves were attributable to oil and approximately 92.5% were attributable to
natural gas, on a Boe basis.
The following table summarizes EXCO's proved reserves on December 31,
1997, and was prepared in accordance with the rules and regulations of the
Commission:
<TABLE>
<CAPTION>
PROVED RESERVES
On December 31, 1997
<S> <C>
Oil and Liquids (Bbls)
Proved Developed ......................................... 56,656
Proved Undeveloped........................................ 1,460
---------
Total.............................................. 58,116
=========
Natural Gas (Mcf)
Proved Developed ......................................... 2,340,784
Proved Undeveloped........................................ 1,985,421
---------
Total.............................................. 4,326,205
=========
</TABLE>
A significant portion of the value of the proved nonproducing reserves
are in the Logansport and the Nine Mile Draw fields. There are risks associated
with recovery of reserves in the nonproducing category. In addition, EXCO must
incur certain costs and undertake certain risks associated with drilling and
workover operations to recover these reserves.
43
<PAGE> 46
The reserve estimates presented as of December 31, 1997 have been
prepared by Lee Keeling and Associates, Inc., independent petroleum engineers,
Tulsa, Oklahoma, and are a part of their report on EXCO's oil and natural gas
properties. Estimates of oil and natural gas reserves are, of necessity,
projections based on engineering data and, thus, are forward-looking in nature.
However, because of the uncertainties inherent in the interpretation of such
data, EXCO cannot ensure that the reserves set forth herein will ultimately be
realized and the actual results could differ materially. See Note 11 to EXCO's
Financial Statements herein for additional information regarding EXCO's oil and
natural gas reserves, including the present value of future net revenues.
Previous reserve estimates as of March 31, 1995 reported herein were prepared by
Milmac Operating Company, independent petroleum engineers, Lubbock, Texas.
Previous reserve estimates as of December 31, 1995 and December 31, 1996
reported herein were prepared by Lee Keeling and Associates, Inc.
RESERVES REPORTED TO OTHER AGENCIES
Estimates of oil and natural gas reserves have not been filed with or
included in reports to any federal authority or agency other than the
Commission.
PRODUCTION
The following table summarizes for the periods indicated, EXCO's
revenues, net production of oil (including condensate) and natural gas sold, the
average sales price per unit of oil (Bbl) and natural gas (Mcf) and costs and
expenses associated with the production of oil and natural gas:
<TABLE>
<CAPTION>
Nine Months
Ended Fiscal Year Ended
December 31, December 31,
------------ --------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Sales:
Oil and Condensate:
Revenue................................. $ 305,569 $ 452,229 $ 282,642
Production sold (Bbls).................. 18,526 22,150 14,453
Average sales price per Bbl............. $ 16.49 $ 20.42 $ 19.56
Natural Gas:
Revenue................................. $ 254,275 $ 419,719 $ 387,334
Production sold (Mcf)................... 181,121 224,024 181,091
Average sales price per Mcf............. $ 1.40 $ 1.87 $ 2.14
Costs and Expenses:
Production costs per Boe................ $ 6.84 $ 7.21 $ 7.21
Depreciation, depletion and
amortization per Boe.................. 1.54 1.46 1.41
</TABLE>
Total oil and natural gas reserves for the fiscal year ended December
31, 1997 decreased 23% from the prior fiscal year primarily due to decreases in
production volumes resulting from the sale in 1997 of certain properties and the
normal depletion of producing wells. The average sales price per barrel of oil
decreased $.86, or 4%, and the average sale price per Mcf of natural gas
increased $.27, or 14%, from such prices for fiscal year end December 31, 1996.
Total oil and natural gas revenues for the fiscal year ended December
31, 1996 increased 56% from the nine month transition period ended December 31,
1995 due to both an increase in oil and natural gas prices and an increase in
production volumes, resulting largely from the 3 month longer time period of
fiscal 1996. The average sales price per barrel of oil increased $3.93, or 24%,
and the average sales price per Mcf of natural gas increased $.47, or 34%, from
such prices for the nine month transition period ended December 31, 1995.
EXCO's net production reported in the preceding table only includes
production that is owned by EXCO and produced to its oil and natural gas
interest, less royalties. Oil production for the fiscal year ended December 31,
1997 was 35% lower and natural gas production was 19% lower than for the fiscal
year ended December 31, 1996. Oil production for the fiscal year ended December
31, 1996 was 16% higher and natural gas production was 24%
44
<PAGE> 47
higher than the nine month transition period ended December 31, 1995. On a Boe
basis total production for the fiscal year ended December 31, 1996 decreased 25%
from the fiscal year ended December 31, 1996 and total production for the fiscal
year ended December 31, 1996 increased 22% from the nine month transition period
ended December 31, 1995.
PRODUCTIVE WELLS
The following table sets forth EXCO's interest in productive wells
(producing wells and wells capable of production) on December 31, 1997. The
total gross oil and natural gas wells does not include any multiple completions.
On December 31, 1997, EXCO did not own an interest in any well that was being
completed.
<TABLE>
<CAPTION>
Gross Wells Net Wells
------------------------- ---------------------------
(Oil) (Gas) (Total) (Oil) (Gas) (Total)
------- ------- --------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Kansas.......................... 0 1 1 0 .08 .08
Louisiana....................... 0 2 2 0 .96 .96
North Dakota.................... 2 0 2 .07 0 .07
Oklahoma........................ 1 1 2 .02 .02 .04
Texas........................... 25 15 40 3.16 5.45 8.61
------- ------- --------- ------- ------- ----------
Total...................... 28 19 47 3.25 6.51 9.76
</TABLE>
DRILLING ACTIVITIES
With respect to its drilling operations, EXCO plans to concentrate on
lower risk, development-type properties, generally consisting of drilling to
reservoirs from which production is or formerly was being obtained. The drilling
of development wells is subject to the normal risk of dry holes, or a failure to
produce oil and natural gas in commercial quantities. The degree of risk varies
depending, among other things, on the distance between the well and the nearest
producing well, other available geological information and the geological
features of the area. In the past, EXCO has drilled higher risk,
exploratory-type wells, primarily in geological basins with relatively high
levels of drilling density and where adequate subsurface information in the form
of well logs and seismic data was generally available to evaluate potential
hydrocarbon accumulations. All drilling activities are subject to the risk of
encountering unusual or unexpected formations and pressures and other conditions
that may result in financial losses or liabilities to third parties or
governmental entities, many of which may not be covered by insurance. The number
and type of wells drilled by EXCO will vary depending on the amount of funds
available for drilling, the cost of each well, the size of the fractional
working interests acquired by EXCO in each well and the estimated recoverable
reserves attributable to each well.
<TABLE>
<CAPTION>
EXPLORATORY WELLS
-----------------------------------------------------------
Gross Net
--------------------------- ---------------------------
Productive Dry Total Productive Dry Total
------------ ----- ------- ------------ ----- -------
<S> <C> <C> <C> <C> <C> <C>
Nine Month Transition Period Ended
December 31, 1995 .................. -- 2 2 .00 .13 .13
Year Ended December 31, 1996 ......... -- -- -- .00 .00 .00
Year Ended December 31, 1997 ......... -- -- -- .00 .00 .00
DEVELOPMENT WELLS
-----------------------------------------------------------
Gross Net
-------------------------- ---------------------------
Productive Dry Total Productive Dry Total
------------ ----- ------ ------------ ----- -------
<S> <C> <C> <C> <C> <C> <C>
Nine Month Transition Period Ended
December 31, 1995 .................. 1 -- 1 .11 .00 .11
Year Ended December 31, 1996 ......... -- -- -- .00 .00 .00
Year Ended December 31, 1997 ......... 1 -- 1 .12 .00 .12
</TABLE>
45
<PAGE> 48
The number of wells drilled refers to the number of wells (holes)
completed at any time during the fiscal year, regardless of when drilling was
initiated. All drilling activities referenced in the above tables were conducted
in the State of Texas. In April 1998, EXCO drilled and completed one development
well in Maverick County, Texas.
ACREAGE
The following table sets forth EXCO's interest in developed acreage and
undeveloped acreage on December 31, 1997:
<TABLE>
<CAPTION>
Developed Acreage Undeveloped Acreage
----------------- -------------------
Gross Net Gross Net
------- ------ ------- ------
<S> <C> <C> <C> <C>
Kansas ............................ 160 12 640 50
Louisiana ......................... 1,280 616 0 0
North Dakota ...................... 472 15 320 8
Oklahoma .......................... 320 5 0 0
Texas ............................. 5,535 2,169 7,061 869
------- ------ ------- ------
Total .................... 7,767 2,817 8,021 927
</TABLE>
The primary terms of the oil and natural gas leases covering the
majority of EXCO's undeveloped acreage expire at various dates, generally
ranging from 1 to 5 years. EXCO can retain its interest in undeveloped acreage
by drilling activity that establishes commercial reserves sufficient to maintain
the lease. Certain of EXCO's undeveloped acreage in Texas is being "held by
production," for which expiration will not occur until production ceases from
all wells on the particular leases.
SALES OF PRODUCING PROPERTIES AND UNDEVELOPED ACREAGE
EXCO evaluates properties on an ongoing basis to determine the economic
viability of the property and whether such property enhances the objectives of
EXCO. During the course of normal business, EXCO may dispose of producing
properties and undeveloped acreage if EXCO believes that such disposition is in
its best interests.
In the fiscal year ended December 31, 1997, EXCO sold its interest in 3
major groups of producing oil properties in Texas and Illinois for a total of
$270,000 which reduced the full cost pool accordingly. In the fiscal year ended
December 31, 1996, EXCO exchanged its interest in 4 non-operated producing wells
for an interest in each of the 4 operated producing wells. In the nine month
transition period ended December 31, 1995, EXCO sold a portion of its interest
in an undeveloped lease, which reduced EXCO's basis in the lease by $28,000.
PRODUCTS, MARKETS AND REVENUES
Oil and natural gas are the principal products currently produced by
EXCO. EXCO does not refine or process the oil and natural gas that it produces.
EXCO sells the oil it produces under short-term contracts at market prices in
the areas in which the producing properties are located, generally at F.O.B.
field prices posted by the principal purchase of oil in such areas.
Natural gas produced from EXCO's properties is sold under both
short-term and long-term contracts to transmission and utility companies that
have pipelines in the vicinity of the producing properties or that will
construct pipelines to such properties. The contracts are of a type common
within the industry, and a separate contract is usually negotiated for each
property. Typically, EXCO's sales contracts are made for terms ranging from
day-to-day up to 6 months.
The availability of a ready market for oil and natural gas and the
prices of oil and natural gas are dependent upon a number of factors that are
beyond the control of EXCO. These factors include, among other things, the level
46
<PAGE> 49
of domestic production and economic activity generally, the availability of
imported oil and natural gas, actions taken by foreign oil producing nations,
the availability of natural gas pipelines with adequate capacity and other
transportation facilities, the availability and marketing of other competitive
fuels, fluctuating and seasonal demand for oil, natural gas and refined products
and the extent of governmental regulation and taxation (under both present and
future legislation) of the production, refining, transportation, pricing, use
and allocation of oil, natural gas, refined products and substitute fuels.
Accordingly, in view of the many uncertainties affecting the supply and demand
for oil, natural gas and refined petroleum products, it is not possible to
predict accurately the prices or marketability of the oil and natural gas from
any producing well in which EXCO has or may acquire an interest.
Oil prices have been subject to significant fluctuations over the past
decade. Levels of production maintained by the Organization of Petroleum
Exporting Companies ("OPEC") member nations and other major oil producing
countries are expected to continue to be a major determinant of oil price
movements in the future. As a result, future oil price movements cannot be
predicted with any certainty. Similarly, during the past several years, the
market price for natural gas has been subject to significant fluctuations on a
monthly basis, as well as from year to year. These frequent changes in the
market price make it impossible for EXCO to predict natural gas price movements
with any certainty.
EXCO cannot provide assurance that it will be able to market all oil or
natural gas that EXCO produces or, if such oil or natural gas can be marketed,
that favorable price and contractual terms can be negotiated. Changes in oil and
natural gas prices may significantly affect the revenues and cash flow of EXCO
and the value of its oil and natural gas properties. Further, significant
declines in the prices of oil and natural gas may have a material adverse effect
on the business and financial condition of EXCO. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations."
In certain areas in which EXCO engaged in oil and natural gas
production activities, the supply of oil and natural gas available for delivery
from time to time exceeds the demand. During such times, companies purchasing
oil and natural gas in such areas reduce the amount of oil and natural gas that
they will purchase or "take." If buyers cannot be readily located for newly
discovered oil and natural gas reserves, newly completed oil and natural gas
wells may be shut-in for various periods of time. As a result, the over-supply
of oil and natural gas in certain areas may cause EXCO to experience "take"
problems or may adversely affect EXCO's ability to obtain contracts to market
oil and natural gas discovered in wells in which EXCO owns an interest.
The following table sets forth the amount of EXCO's oil sales, natural
gas sales and the percent of oil and natural gas sales to total revenues for the
periods indicated:
<TABLE>
<CAPTION>
Percent of
Oil and Gas Sales to
Total Revenues
--------------------
Total Oil and
Period Ended Oil Sales Gas Sales Gas Sales Oil Gas
- ------------------------------------------------- ----------- ----------- -------------- ----- -------
<S> <C> <C> <C> <C> <C>
Nine Month Transition Period December 31, 1995... $ 306,000 $ 254,000 $ 560,000 48% 40%
Year Ended December 31, 1996..................... 452,000 420,000 872,000 50% 46%
Year Ended December 31, 1997..................... 283,000 387,000 670,000 41% 55%
</TABLE>
In February 1996, EXCO changed its fiscal year from a March 31 year end
to a December 31 year end, resulting in a short year of 9 months for the
transition period ended December 31, 1995. The comparability of most of the year
to year comparisons in this report is affected by the fact that the nine month
transition period ended December 31, 1995 is 3 months shorter than the full
fiscal years ended December 31, 1996 and December 31, 1997.
DELIVERY COMMITMENTS
EXCO is not presently obligated to provide a fixed and determinable
quantity of oil or natural gas under any existing contract or agreement.
47
<PAGE> 50
CUSTOMERS
During the fiscal year ended December 31, 1997, sales of oil and
natural gas to three purchasers, Scurlock Permian Corporation, Delhi Gas
Pipeline Corporation and Aurora Natural Gas, L.L.C., accounted for 22%, 19%, and
14%, respectively, of EXCO's total revenues. During the fiscal year ended
December 31, 1996, sales of oil and natural gas to two purchasers, Scurlock
Permian Corporation and Delhi Gas Marketing Corp., accounted for 26% and 15%,
respectively, of EXCO's total revenues. During the nine month period ended
December 31, 1995, sales of oil and natural gas to three purchasers, Scurlock
Permian Corporation, Delhi Gas Marketing Corp. and Pride Pipeline Company,
accounted for 20%, 13% and 10%, respectively, of EXCO's total revenues. Although
the loss of any one of EXCO's oil and natural gas purchasers could temporarily
cease or delay EXCO's production and sale of its oil and natural gas in the
purchasers' particular service area, EXCO believes it would be able, under
current economic circumstances, to contract with other purchasers for its oil
and natural gas production.
REGULATION
GENERAL
EXCO's operations are affected from time to time in varying degrees by
political developments and federal and state laws and regulations. In
particular, oil and natural gas production operations and economics are or have
been affected by price control, tax and other laws relating to the oil and
natural gas industry, by changes in such laws and by changing administrative
regulations. There are currently no price controls on oil, condensate or NGLs.
To the extent price controls remain applicable after the enactment of the
Natural Gas Wellhead Decontrol Act of 1989, EXCO is of the opinion that such
controls will not have a significant impact on the prices received by EXCO for
natural gas produced in the near future.
Legislation affecting the oil and natural gas industry is under
constant review for amendment or expansion, frequently increasing the regulatory
burden. Also, numerous departments and agencies, both federal and state, are
authorized by statute to issue and have issued rules and regulations binding on
the oil and natural gas industry and its individual members, compliance with
which is often difficult and costly and certain of which carry substantial
penalties for the failure to comply. EXCO cannot predict how existing
regulations may be interpreted by enforcement agencies or the courts, nor
whether amendments or additional regulations will be adopted, nor what effect
such interpretations and changes may have on EXCO's business or financial
condition.
NATURAL GAS REGULATION
Historically, interstate pipeline companies generally acted as
wholesale merchants by purchasing natural gas from producers and reselling the
natural gas to local distribution companies and large end users. Commencing in
late 1985, the Federal Energy Regulatory Commission ("FERC") issued a series
of orders that have had a major impact on interstate natural gas pipeline
operations, services, and rates, and thus have significantly altered the
marketing and price of natural gas. The FERC's key rule making action, Order No.
636 ("Order 636"), issued in April 1992, required each interstate pipeline to,
among other things, "unbundle" its traditional bundled sales services and create
and make available on an open and nondiscriminatory basis numerous constituent
services (such as gathering services, storage services, firm and interruptible
transportation services, and standby sales and natural gas balancing services),
and to adopt a new rate making methodology to determine appropriate rates for
those services. To the extent the pipeline company or its sales affiliate makes
natural gas sales as a merchant in the future, it does so pursuant to private
contracts in direct competition with all other sellers, such as EXCO; however,
pipeline companies and their affiliates were not required to remain "merchants"
of natural gas, and most of the interstate pipeline companies have become
"transporters only." In subsequent orders, the FERC largely affirmed the major
features of Order 636 and denied a stay of the implementation of the new rules
pending judicial review. By the end of 1994, the FERC had concluded the Order
636 restructuring proceedings, and, in general, accepted rate filings
implementing Order 636 on every major interstate pipeline. However, even through
the implementation of Order 636 on individual interstate pipelines is
essentially complete, many of the individual pipeline restructuring proceedings,
as well as Order 636 itself and the regulations promulgated thereunder, are
subject to pending appellate review and could possibly be changed as a result of
future court orders. EXCO cannot predict whether the FERC's orders will be
affirmed on appeal or what the effects will be on its business.
48
<PAGE> 51
In recent years the FERC also has pursued a number of other important
policy initiatives which could significantly affect the marketing of natural
gas. Some of the more notable of these regulatory initiatives include (i) a
series of orders in individual pipeline proceedings articulating a policy of
generally approving the voluntary divestiture of interstate pipeline owned
gathering facilities by interstate pipelines to their affiliates (the so-called
"spin down" of previously regulated gathering facilities to the pipeline's
nonregulated affiliate), (ii) the completion of a rule making involving the
regulation of pipelines with marketing affiliates under Order No. 497, (iii) the
FERC's ongoing efforts to promulgate standards for pipeline electronic bulletin
boards and electronic data exchange, (iv) a generic inquiry into the pricing of
interstate pipeline capacity, (v) efforts to refine the FERC's regulations
controlling operation of the secondary market for released pipeline capacity,
and (vi) a policy statement regarding market based rates and other
non-cost-based rates for interstate pipeline transmission and storage capacity.
Several of these initiatives are intended to enhance competition in natural gas
markets, although some, such as "spin downs," may have the adverse effect of
increasing the cost of doing business on some in the industry as a result of the
monopolization of those facilities by their new, unregulated owners. The FERC
has attempted to address some of these concerns in its orders authorizing such
"spin downs," but it remains to be seen what effect these activities will have
on access to markets and the cost to do business. As to all of these recent FERC
initiatives, the ongoing, or in some instances, preliminary evolving nature of
these regulatory initiatives makes it impossible at this time to predict their
ultimate impact on EXCO's business.
EXCO owns, directly or indirectly, certain natural gas facilities that
it believes meet the traditional tests the FERC has used to establish a
company's status as a gatherer not subject to FERC jurisdiction under the
Natural Gas Act of 1938 (the "NGA"). Moreover, recent orders of the FERC have
been more liberal in their reliance upon or use of the traditional tests, such
that in many instances, what was once classified as "transmission" may now be
classified as "gathering." EXCO transports its own natural gas through these
facilities. EXCO also transports certain of its natural gas through gathering
facilities owned by others, including interstate pipelines. With respect to item
(i) in the preceding paragraph, on May 27, 1994, the FERC issued orders in the
context of the "spin off" or "spin down" of interstate pipeline owned gathering
facilities. A "spin off" is a FERC approved sale of such facilities to a
non-affiliate. A "spin down" is the transfer by the interstate pipeline of its
gathering facilities to an affiliate. A number of spin offs and spin downs have
been approved by the FERC and implemented. The FERC held that it retains
jurisdiction over gathering provided by interstate pipelines, but that it
generally does not have jurisdiction over pipeline gathering affiliates, except
in the event of affiliate abuse (such as actions by the affiliate undermining
open and nondiscriminatory access to the interstate pipeline). These orders
require nondiscriminatory access for all sources of supply, prohibit the tying
of pipeline transportation service to any service provided by the pipeline's
gathering affiliate, and require the new gathering company to submit a "default"
contract if a satisfactory contract cannot be mutually agreed upon by the
interstate pipeline and its existing customers. Several petitions for rehearing
of the FERC's May 27, 1994, orders were filed. On November 30, 1994, the FERC
issued a series of rehearing orders largely affirming the May 27, 1994, orders.
The FERC clarified that "default" contracts are intended to serve only as a
transition mechanism to prevent arbitrary termination of gathering service to
existing customers. Also, the FERC now requires interstate pipelines to not only
seek authority under Section 7(b) of the NGA to abandon certificated facilities,
but also to seek authority under Section 4 of the NGA to terminate service from
both certificated and uncertificated facilities. On December 31, 1994, an appeal
was filed with the U.S. Court of Appeals for the D.C. Circuit to overturn three
of the FERC's November 30, 1994, orders. EXCO cannot predict what the ultimate
effect of the FERC's orders pertaining to gathering will have on its production
and marketing, or whether the Appellate Court will affirm the FERC's orders on
these matters.
FEDERAL TAXATION
The federal government is continually proposing tax initiatives that
may affect the oil and natural gas industry, including EXCO. Due to the
preliminary nature of these proposals, EXCO is unable to determine what effect,
if any, the proposals would have on product demand or EXCO's results of
operations.
STATE REGULATION
The various states in which EXCO conducts activities regulate the
drilling, operation and production of oil and natural gas wells, such as the
method of developing new fields, spacing of wells, the prevention and clean-up
of pollution, and maximum daily production allowables based on market demand and
conservation considerations.
49
<PAGE> 52
ENVIRONMENTAL REGULATION
EXCO's exploration, development and production of oil and natural gas,
including its operation of saltwater injection and disposal wells, are subject
to various federal, state and local environmental laws and regulations. Such
laws and regulations can increase the costs of planning, designing, installing
and operating oil and natural gas wells. EXCO's domestic activities are subject
to a variety of environmental laws and regulations, including, but not limited
to, the OPA, the Clean Water Act ("CWA"), the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA"), the Resource Conservation
and Recovery Act ("RCRA"), the Clean Air Act ("CAA") and the Safe Drinking Water
Act ("SDWA"), as well as state regulations promulgated under comparable state
statutes. EXCO also is subject to regulations governing the handling,
transportation, storage and disposal of naturally occurring radioactive
materials that are found in its oil and natural gas operations. Civil and
criminal fines and penalties may be imposed for non-compliance with these
environmental laws and regulations. Additionally, these laws and regulations
require the acquisition of permits or other governmental authorizations before
undertaking certain activities, limit or prohibit other activities because of
protected areas or species and impose substantial liabilities for cleanup of
pollution.
Under the OPA, a release of oil into water or other areas designated by
the statue could result in EXCO being held responsible for the costs of
remediating such a release, certain OPA specified damages and natural resource
damages. The extent of that liability could be extensive, as set forth in the
statute, depending on the nature of the release. A release of oil in harmful
quantities or other materials into water or other specified areas could also
result in EXCO being held responsible under the CWA for the cost of remediation,
and civil and criminal fines and penalties.
CERCLA and comparable state statutes, also known as "Superfund" laws,
can impose joint and several and retroactive liability, without regard to fault
or the legality of the original conduct, on certain classes of persons for the
release of a "hazardous substance" into the environment. In practice, cleanup
costs are usually allocated among various responsible parties. Potentially
liable parties include site owners or operators, past owners or operators under
certain conditions and entities that arrange for the disposal or treatment of,
or transport hazardous substances found at the site. Although CERCLA, as
amended, currently exempts petroleum, including, but not limited to, crude oil,
natural gas and natural gas liquids from the definition of hazardous substance,
EXCO's operations may involve the use or handling of other materials that may be
classified as hazardous substances under CERCLA. Furthermore, there can be no
assurance that the exemption will be preserved in future amendments of the act,
if any.
RCRA and comparable state and local requirements impose standards for
the management, including treatment, storage and disposal of both hazardous and
nonhazardous solid wastes. EXCO generates hazardous and nonhazardous solid waste
in connection with its routine operations. From time to time, proposals have
been made that would reclassify certain oil and natural gas wastes, including
wastes generated during pipeline, drilling and production operations, as
"hazardous wastes" under RCRA which would make such solid wastes subject to must
more stringent handling, transportation, storage, disposal and clean-up
requirements. This development could have a significant impact on EXCO's
operating costs. While state laws vary on this issue, state initiatives to
further regulate oil and natural gas wastes could have a similar impact.
Because oil and natural gas exploration and production, and possibly
other activities, have been conducted at some of EXCO's properties by previous
owners and operators, materials from these operations remain on some of the
properties and in some instances require remediation. In addition, EXCO has
agreed to indemnify Sellers of producing properties from whom EXCO has acquired
reserves against certain liabilities for environmental claims associated with
such properties. While EXCO does not believe the costs to be incurred by EXCO
for compliance and remediating previously or currently owned or operated
properties will be material, there can be no guarantee that such costs will not
result in material expenditures.
Additionally, in the course of EXCO's routine oil and natural gas
operations, surface spills and leaks, including casing leaks, of oil or other
materials occur, and EXCO incurs costs for waste handling and environmental
compliance. Moreover, EXCO is able to control directly the operations of only
those wells for which it acts as the operator. Notwithstanding EXCO's lack of
control over wells owned by EXCO but operated by others, the failure
50
<PAGE> 53
of the operator to comply with applicable environmental regulations may, in
certain circumstances, be attributable to EXCO.
It is not anticipated that EXCO will be required in the near future to
expend amounts that are material in relation to its total capital expenditures
program by reason of environmental laws and regulations, but inasmuch as such
laws and regulations are frequently changed, EXCO is unable to predict the
ultimate cost of compliance. There can be no assurance that more stringent laws
and regulations protecting the environment will not be adopted or that EXCO will
not otherwise incur material expenses in connection with environmental laws and
regulations in the future. See "Risk Factors -- Governmental Regulation."
OTHER PROPOSED LEGISLATION
In the past, Congress has been very active in the area of natural gas
regulation. Legislative proposals are pending in various states which, if
enacted, could significantly affect the petroleum industry. EXCO cannot predict
which proposals, if any, may actually be enacted by Congress or any of the state
legislatures, and what impact, if any, such proposals may have on EXCO's
operations.
COMPETITION
The oil and natural gas industry is highly competitive. EXCO encounters
strong competition from other independent operators and from major oil companies
in acquiring properties in contracting for drilling equipment and in securing
trained personnel. Many of these competitors have financial resources and staffs
substantially larger than those available to EXCO.
Exploitation for and production of oil and natural gas is also affected
by competition for drilling rigs and the availability of tubular goods and
certain other equipment. While the oil and natural gas industry has experienced
shortages of drilling rigs and equipment, pipe and personnel in the past, EXCO
is not presently experiencing any shortages and does not foresee any such
shortages in the near future. EXCO is unable to predict how long current market
conditions will continue.
Competition for attractive oil and natural gas producing properties,
undeveloped leases and drilling rights is also strong, and EXCO cannot provide
assurance that it will be able to compete satisfactorily in the acquisition of
such properties. Many major oil companies have publicly indicated their
decisions to concentrate on overseas activities and have been actively marketing
certain of their existing producing properties for sale to independent
producers. There can be no assurance that EXCO will be successful in acquiring
any such properties.
EMPLOYEES
As of June 30, 1998, EXCO employed fifteen persons of which two were
involved in field operations and thirteen were engaged in office and
administrative activities. None of EXCO's employees are represented by unions or
covered by collective bargaining agreements. To date, EXCO has not experienced
any strikes or work stoppages due to labor problems and considers its relations
with its employees to be good. EXCO also utilizes the services of independent
consultants on a contract basis.
PROPERTIES
EXCO currently leases 2,000 square feet of office space in Dallas,
Texas which is used as EXCO's headquarters. The lease expires in December,
1999, and provides for monthly rental payments of $6,440 plus a CPI increase in
year two. EXCO also maintains a field office in Tyler, Texas.
LEGAL PROCEEDINGS
EXCO is not presently party to, nor is any of its property the subject
of, any material pending legal proceedings other than routine litigation
incidental to EXCO's business.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following discussion describes certain relationships and related
transactions between EXCO and certain officers, directors and shareholders. EXCO
believes the terms of all such transactions were on terms comparable to those
that could have been negotiated with an unaffiliated third-party. Any future
transactions with officers, directors or 5% shareholders will be on terms no
less favorable to EXCO than could be obtained from third parties. EXCO does not
currently have a formal policy regarding the evaluation of affiliated
transactions. However, under the requirements of Article 2.35 of the Texas
Business Corporation Act, an affiliated transaction must be authorized by one of
the following means: (i) the affirmative vote of a majority of the disinterested
directors, (ii) the affirmative vote of the shareholders or (iii) the board of
directors, a committee thereof or the shareholders if the transaction is fair to
the corporation. Moreover, under the terms and covenants of the Credit Facility,
EXCO may not engage in any transaction with an affiliate unless the transaction
is only as favorable to the affiliate as what could be obtained in an arm's
length transaction with an unaffiliated third party in accordance with
prevailing industry customs and practices.
MILLER SHARE PURCHASE TRANSACTION
On December 19, 1997, Mr. Miller purchased (the "Purchase") 413,423
shares of Common Stock of EXCO, par value $.01 per share, for $3.00 per share.
Upon completion of the Purchase, Mr. Miller was at that date the beneficial
owner of approximately 51% of the Common Stock of EXCO.
The Purchase was effected pursuant to the terms of a Stock Option
Agreement first dated December 8, 1997 among Mr. Miller, on the one hand, and
Richard D. Collins, Dave Fitzgerald, Inc., David N. Fitzgerald, Francis C.
Fitzgerald, W.R. Granberry, Glenn L. Seitz, Suzanne F. Bobo, J.A. Dinger, John
A. Schlensker, Donald C. Thomas, Jr. and R. Scott Collins (collectively, the
"Sellers"), on the other (the "Option Agreement"). The Sellers included
directors of EXCO and members of EXCO's management and certain affiliates.
On December 18, 1997, Mr. Miller exercised his option to purchase the
shares. On December 19, 1997, Mr. Miller executed a Stock Purchase Agreement
among Mr. Miller, on the one hand, and certain Sellers, on the other (the
"Purchase Agreement"). Pursuant to the terms of the Option Agreement and the
Purchase Agreement, the Purchase was consummated December 19, 1997. In
connection with the Purchase, Mr. Miller paid the Sellers an aggregate of
approximately $1,240,269 in cash from personal funds. The consideration paid by
Mr. Miller in connection with the Purchase was determined by arms' length
negotiations between Mr. Miller and the Sellers.
In addition, on December 19, 1997, the Board of Directors of EXCO held
a meeting at which time the resignations of various officers and directors of
EXCO were tendered and accepted. The Board appointed Mr. Miller as a Director
and then elected him Chairman and Chief Executive Officer of EXCO. The Board
also appointed Mr. Eubank to the Board of Directors and elected him President,
Treasurer and Chief Financial Officer of EXCO. Mr. David N. Fitzgerald resigned
as Chairman of the Board of EXCO, Mr. Gleeson resigned as President and Chief
Executive Officer of EXCO, Mr. Glenn L. Seitz resigned as a Director and
Treasurer of EXCO, Mr. Richard D. Collins resigned as a Director and Secretary
of EXCO and Mr. W.R. Granberry resigned as a Director of EXCO. Richard E. Miller
was elected Secretary of EXCO. Messrs. Fitzgerald and Gleeson remained as
Directors of EXCO.
On December 31, 1997, Mr. Eubank resigned as Chief Financial Officer
and Dr. Ramsey was appointed Chief Financial Officer and Vice President of EXCO.
PRIVATE PLACEMENT
On December 31, 1997, EXCO issued, in a private placement conducted
pursuant to Section 4(2) of the Securities Act, 100,000 shares of Common Stock,
par value $.01 per share, to Mr. Eubank for an aggregate purchase price of
$300,000, or $3.00 per share. In addition, on that same date EXCO issued, in a
private placement, 100,000 shares to Mr. Ellis for an aggregate purchase price
of $300,000, or $3.00 per share. The purchase price for these shares was based
on the purchase price paid by Mr. Miller for his shares in the Purchase. All of
the shares so issued are deemed "restricted" shares under the Federal securities
laws. The $600,000 aggregate gross purchase consideration will be used as
general corporate working capital by EXCO.
RICHARD D. COLLINS
The Board of Directors authorized a payment of $23,736 to Richard D.
Collins, a former director of EXCO, for expenses related to attempting to locate
acquisition candidates for EXCO and consulting services rendered during 1997 to
EXCO.
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MAVERICK COUNTY, TEXAS ACQUISITION
Effective January 1, 1998, EXCO acquired interests in 9 gross (7.0 net)
producing natural gas wells, 2 gross (1.87 net) nonproducing wells, 360 gross
(280 net) developed acres and 3,384 gross (2,843 net) undeveloped acres in
Maverick County, Texas (the "Acquisition"). The Acquisition included a majority
of the working interest and operator status for all but one of such wells. All
of the wells produce from the Glen Rose formation at depths between 5,000 and
5,900 feet. EXCO has identified at least two potential development well
locations, one of which was drilled and completed as a producing gas well in
April 1998. The estimated cost to EXCO for its 48.75% before payout (43.875%
after payout) interest in such well is $219,000. Reserve estimates as of
December 31, 1997 indicate that the SEC PV-10, attributable to EXCO's interest
in the current wells and two development wells is approximately $1.5 million
($1.37 million Standardized Measure). All of the estimated reserves are
classified as proved reserves, with 66% attributable to proved developed
producing reserves and 34% attributable to proved undeveloped reserves. Richard
E. Miller, General Counsel, General Land Manager and Secretary of EXCO was one
of the selling parties in the Acquisition and received the sum of $29,440 for
his interest as a seller. In the sale to EXCO, Richard E. Miller retained an
overriding royalty interest of less than 1% in two of the producing wells
purchased and a 17.5% working interest in the development well which was drilled
in April 1998. The sellers in the Acquisition, including Richard E. Miller,
retained an interest in future drilling on certain of the acquired acreage,
including the second of the two development wells referred to above. The
retained interest of the sellers was equal to one-third of the interest they
owned at the time of the sale. The reserve estimates set forth above fully
reflect and do not include the interests retained by the sellers, including
Richard E. Miller. In connection with the Acquisition, Richard E. Miller also
received a 3% finder's fee in the amount of $22,806 for his role in bringing the
Acquisition to EXCO's attention.
J. MICHAEL MUCKLEROY
During the fiscal year ended December 31, 1997, Mr. Muckleroy, who
became a director on March 31, 1998, owned the following working interests in
the following wells operated by EXCO: the Wilbanks #1 (4.18%); the McGarraugh
1-139 (2%); the Perkins #4 (6%); the Mitchell #1 (11.7%); the Mitchell #2 (18%);
and the Coats #5 (11%). Mr. Muckleroy received approximately $2,700 per month as
a result of his working interests in wells operated by EXCO. On March 5, 1998
the Board of Directors issued 12,500 shares of Common Stock, par value $.01 per
share, to Mr. Muckleroy in exchange for his working interest in the
aforementioned wells.
GLENN L. SEITZ
Mr. Seitz, a director of EXCO until December 19, 1997, owns working
interests in the following wells operated by EXCO: the Perkins #4 (.5%); the
Mitchell #1 (.5%); the Mitchell #2 (.5%); and the Coats #5 (.5%). Mr. Seitz
receives approximately $96 per month as a result of his working interests in
wells operated by EXCO.
INDEMNIFICATION ARRANGEMENTS
EXCO has authority under Articles 2.02(A)(16) and 2.02-1 of the Texas
Business Corporation Act to indemnify its officers and directors to the extent
provided for in such statute.
Article VI of EXCO's Restated Bylaws provides that EXCO shall indemnify
each of its directors and officers, its former directors and officers and agents
of EXCO against expenses actually and reasonably incurred by him or her in
connection with the defense of any action, suit or proceeding, civil or
criminal, in which such person is made a party by reason of being or having been
such director or officer, except in situations where he or she shall be adjudged
in such action, suit or proceeding to be liable for negligence or misconduct in
the performance of his or her duty to EXCO. In the event of a criminal
conviction (whether based on a plea of guilty or nolo contendere
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or its equivalent, or after trial), such conviction shall not be deemed an
adjudication of liability for negligence or misconduct in the performance of
duty to EXCO if such director or officer acted in good faith in what he or she
considered to be the best interest of EXCO and without reasonable cause to
believe that his or her actions were illegal. In absence of an adjudication
which expressly absolves the director or officer of liability to EXCO or its
shareholders for negligence or misconduct, or in the event of a settlement, the
right to indemnification of a director or officer shall be conditioned upon
prior resolution adopted by two-thirds of the disinterested members of the Board
or by independent counsel.
EXCO intends to maintain insurance against liabilities incurred by its
officers and directors in defense of actions to which they are made parties by
reason of their positions as officers and directors.
Insofar as indemnification for liabilities arising under the Securities
Act is permitted for directors, officers or persons controlling EXCO pursuant to
the foregoing provisions, EXCO has been informed that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
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DESCRIPTION OF CAPITAL STOCK
EXCO's authorized capital stock consists of (i) 25,000,000 shares of
Common Stock and (ii) 10,000,000 shares of Preferred Stock. Upon consummation of
the Rights Offering and assuming all Rights are exercised, 6,537,696 shares of
Common Stock and no shares of Preferred Stock will be outstanding (before
adjustments for fractional shares). The following summary of EXCO's capital
stock does not purport to be complete and is subject to, and qualified in its
entirety by, the Articles of Incorporation. On March 31, 1998, EXCO consummated
a Reverse Stock Split. See "Recent Developments."
COMMON STOCK
EXCO is authorized to issue 25,000,000 shares of Common Stock, par
value $.02 per share. As of the Record Date for the Rights Offering, there were
594,336 shares of Common Stock issued and outstanding held by approximately
1,600 shareholders of record. All shares of Common Stock have equal voting
rights on the basis of one vote per share on matters to be voted on by the
shareholders. Cumulative voting for the election of directors is not permitted.
The vote or concurrence of two-thirds of the outstanding voting shares of Common
Stock is required for any amendments to the Articles of Incorporation, or for
the approval of any merger or consolidation, any distributions in partial
liquidation of EXCO, any sale, lease, exchange or other disposition not in the
ordinary course of business of all, or substantially all, of the property or
assets of EXCO or the dissolution of EXCO.
Shareholders of Common Stock are entitled to receive dividends if, when
and as declared by the Board out of funds legally available therefor. Shares of
Common Stock have no preemptive, conversion, sinking fund, redemption or similar
provisions. In the event of liquidation of EXCO, shareholders of Common Stock
are entitled to share on a pro rata basis in the distribution of EXCO's assets,
if any, after the payment of liabilities and the liquidation preference, if any,
on any preferred stock then outstanding. All outstanding shares of Common Stock
are, and the shares of Common Stock being issued and sold by EXCO in the
offering made hereby, will be, when issued and paid for, fully paid and
nonassessable.
A total of 1,000,000 shares of Common Stock have been reserved for
issuance under EXCO's 1998 Stock Option Plan of which, as of June 30, 1998,
1,000,000 shares remain available for grants of stock options.
PREFERRED STOCK
EXCO is authorized to issue 10,000,000 shares of Preferred Stock. The
Preferred Stock may be issued in series, and shares of each series shall have
such rights and preferences as shall be fixed by the Board in the resolution or
resolutions authorizing the issuance of that particular series. In designating
any series of Preferred Stock the Board has authority, without further action by
the holders of Common Stock, to fix the number of shares
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constituting that series and to fix the dividends rights, dividend rate,
conversion rights, rights and terms of redemption (including any sinking fund
provisions), and the liquidation preferences of that series of Preferred Stock.
The issuance of Preferred Stock could adversely affect the voting power of
holders of Common Stock and the likelihood that such holders will receive
dividend payments and payments upon liquidation and could have the effect of
delaying, deferring or preventing a change in control of EXCO. EXCO has no
present plans to issue any shares of Preferred Stock.
TEXAS LAW AND CERTAIN CORPORATE PROVISIONS
EXCO is subject to the provisions of Article 13 of the Texas
Business Corporation Act. In general, this statute prohibits a publicly-held
Texas corporation from engaging, under certain circumstances, in a "business
combination" with an "affiliated shareholder" for a period of three years after
the date of the transaction in which the person becomes an affiliated
shareholder, unless either (i) prior to the date at which the shareholder became
an affiliated shareholder the Board of Directors approved either the business
combination or the transaction in which the person becomes an affiliated
shareholder, or (ii) the business combination is approved by the Board of
Directors and by two-thirds of the outstanding voting stock of the corporation
(excluding shares held by the affiliated shareholder) at a meeting of the
shareholders (and not by written consent) held not earlier than six months after
the date on which the person became an "affiliated shareholder" of the business
combination. An "affiliated shareholder" is a person who, together with or
through affiliates and associates, beneficially owns or within the preceding
three-year period was the beneficial owner of 20% or more of the corporation's
outstanding voting stock. Article 13 defines a "business combination" to include
any merger, share exchange, conversion and asset based transactions and other
transactions resulting in a financial benefit to the affiliated shareholder or
an associate or affiliate of the affiliated shareholder.
LIMITATIONS ON LIABILITY
As authorized by Article 1301-7.06 of the Texas Miscellaneous
Corporation Laws Act (the "TMCLA"), the Articles of Incorporation provide that
to the fullest extent, now or hereafter permitted by Texas law, EXCO's directors
will have no personal liability to EXCO or its shareholders for monetary damages
for breach or alleged breach of the directors' duty of care. This provision in
the Articles of Incorporation will not eliminate directors' liability resulting
from suits by third parties, and does not affect EXCO or its shareholders'
ability to obtain equitable remedies such as an injunction or a rescission of an
agreement or transaction deemed improper. Furthermore, each director will
continue to be subject to liability for (i) a breach of a director's duty of
loyalty to EXCO or its shareholders, (ii) an act or omission not in good faith
or that involves intentional misconduct or a knowing violation of the law, (iii)
a transaction from which a director received an improper benefit, whether or not
the benefit resulted from an action taken within the scope of the director's
office, (iv) an act or omission for which the liability of a director is
expressly provided for by statute, or (v) an act related to an unlawful share
repurchase or payment of a dividend.
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SELLING SHAREHOLDERS
This Prospectus covers offers and sales of Rights from time to time by each
of the named individuals (each a "Selling Rightsholder" and collectively, the
"Selling Rightsholders") named below. This Prospectus also covers offers and
sales of shares of Common Stock from time to time that may be issued to the
Standby Purchasers under the terms of the Standby Purchase Agreements. This
Prospectus does not cover offers and sales of shares of Common Stock issued to a
named individual upon exercise of their Basic Subscription Privilege or their
Oversubscription Privilege.
The names of the Selling Rightsholders and the Standby Purchasers and the
position, office or other material relationship which each has had with EXCO
in the past three years are as follows:
NAME POSITION
Douglas H. Miller Chairman and Chief Executive Officer of EXCO
and 5% or more shareholder as of December 19,
1997 (1)
T.W. Eubank President and director of EXCO since December
19, 1997; 5% or more shareholder since December
31, 1997 (1)
Earl E. Ellis Director of EXCO since March 31, 1998; 5% or
more shareholder since December 31, 1997 (1)
J. Michael Muckleroy Director of EXCO since March 31, 1998
T. Boone Pickens Director of EXCO since March 31, 1998
Ares Leveraged
Investment Fund, L.P. Standby Purchaser (2)
OCM Principal
Opportunities Fund,
L.P. Standby Purchaser (2)
(1) See "Recent Developments - Change of Control."
(2) See "The Rights Offering - Standby Purchase Agreements."
The following table (i) lists the name of each Selling Rightsholder and
each Standby Purchaser, (ii) the number of shares of Common Stock owned by each
Selling Rightsholder and each Standby Purchaser before this Rights Offering,
(iii) the number of Rights and shares (as to the Standby Purchasers only and
assuming the Standby Purchasers acquired the full 2,000,000 shares and 1,000,000
shares, respectively they may acquire under the Standby Purchase Agreement) that
may be offered by each Selling Rightsholder or each Standby Purchaser pursuant
to this Prospectus,(iv) the number of shares of Common Stock to be owned by each
Selling Rightsholder if all Rights are exercised, and, (v) the percentage of
outstanding Common Stock owned by such Selling Rightsholder and each of the
Standby Purchasers after the Rights Offering. The information below is as of the
date of this Prospectus and has been furnished by the respective selling
holders.
<TABLE>
<CAPTION>
Number of Shares Number of Rights Number of Shares Percentage of
Name of Owned Before or Shares Being Owned After Outstanding
Selling Holder this Rights Offering Registered for Resale this Rights Offering(1) Common Stock(1)
- ---------------------------------------- -------------------- --------------------- ----------------------- ---------------
<S> <C> <C> <C> <C>
Douglas H. Miller....................... 206,711 2,067,110 2,273,821 34.8%
T.W. Eubank............................. 50,000 500,000 550,000 8.4
Earl E. Ellis........................... 50,000 500,000 550,000 8.4
J. Michael Muckleroy.................... 6,250 62,500 68,750 1.1
T. Boone Pickens........................ 7,500 75,000 82,500 1.3
Ares Leveraged Investment Fund, L.P..... 0 2,000,000(2) --(2) --(2)
OCM Principal Opportunities Fund, L.P... 0 1,000,000(2) --(2) --(2)
------- --------- --------- ------
TOTAL 320,461 5,204,610 3,525,071 54.0%
======= ========= ========= ======
</TABLE>
(1) Assumes all Rights are exercised.
(2) For the purposes of EXCO's compliance with the Securities Act disclosure
requirements, EXCO has assumed that the maximum amount that may be acquired
by the Standby Purchasers pursuant to each Standby Purchase Agreement will
be acquired, offered and sold, however, it is EXCO's understanding that the
Standby Purchasers intend to hold any such shares of Common Stock they
acquire for investment purposes.
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PLAN OF DISTRIBUTION
The Rights covered hereby may be offered and sold from time to time by the
Selling Rightsholders. The shares of Common Stock purchased by the Standby
Purchasers may be offered and sold from time to time by the Standby Purchasers.
The Selling Rightsholders and the Standby Purchasers will act independently of
EXCO in making decisions with respect to the timing, manner and size of each
sale. Such sales may be made on the OTC (or other market on which the Rights and
the Common Stock are listed or otherwise qualified for trading), at market
prices prevailing at the time of the sale, at prices related to the then
prevailing market price or in negotiated transactions, including pursuant to an
underwritten offering or pursuant to one or more of the following methods: (i)
purchases by a broker-dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus; (ii) ordinary brokerage
transactions and transactions in which a broker solicits purchasers; and (iii)
block trades in which a broker-dealer so engaged will attempt to sell the Rights
or the Common Stock as agent but may take a position and resell a portion of the
block as principal to facilitate the transaction. In effecting sales,
broker-dealers engaged by the Selling Rightsholders and the Standby Purchasers
may arrange for other broker-dealers to participate. Broker-dealers may receive
commissions or discounts from the Selling Rightsholders or the Standby
Purchasers in amounts to be negotiated immediately prior to the sale. Those
Selling Rightsholders who may be deemed "underwriters" within the meaning of
the Securities Act (including certain affiliates of the Company) will have to
deliver a Prospectus to any Purchaser in connection with the resale of any
Rights.
In connection with the sale of Rights and shares of Common Stock covered
hereby, underwriters or agents may receive compensation from the Selling
Rightsholders or the Standby Purchasers or from purchasers of the Rights and
Common Stock covered hereby for whom they may act as agents, in the form of
discounts, concessions or commissions. Underwriters may sell Rights and shares
of Common Stock to or through dealers and such dealers may receive compensation
in the form of discounts, concessions or commissions from the underwriters
and/or commissions from the purchasers for whom they act as agents.
Underwriters, dealers and agents that participate in the distribution of Rights
and shares of Common Stock covered hereby may be deemed to be underwriters, and
any discounts or commissions received by them from the Selling Rightsholders or
the Standby Purchasers and any profit on the resale of Rights and shares of
Common Stock by them may be deemed to be underwriting discounts and commissions
under the Securities Act. EXCO, any Selling Rightsholder, and the Standby
Purchasers can not presently estimate the amount of such compensation.
Selling Rightsholders may also convey, without charge or other form of
compensation, their Rights to other nonaffiliated third parties.
EXCO knows of no other existing arrangements between any Selling
Rightsholder and any other shareholder, broker, dealer, underwriter or agent
relating to the sale or distribution of the Common Stock.
To the extent required, EXCO will file, during any period in which offers
or sales are being made, a supplement to this Prospectus which sets forth, with
respect to a particular offering, the specific number of Rights and shares of
Common Stock to be sold, the name of the holder, the sales price, the name of
any participating broker, dealer, underwriter or agent, any applicable
commission or discount and any other material information with respect to the
plan of distribution not previously disclosed.
In order to comply with certain states' securities laws, if
applicable, the Rights and shares of Common Stock will be sold in such
jurisdictions only through registered or licensed brokers or dealers. In
addition, in certain states the Rights and shares of Common Stock may not be
sold unless the shares have been registered or qualified for sale in such state
or an exemption from registration or qualification is available and is
satisfied.
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MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion constitutes Haynes and Boone, LLP's opinion
regarding the material federal income tax consequences of the Rights Offering.
This discussion is based on the provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), the Treasury Regulations promulgated thereunder, and
administrative and judicial interpretations thereof, all as in effect as of the
date hereof and all of which are subject to change (possibly on a retroactive
basis). This discussion does not purport to deal with all aspects of federal
income taxation that may be relevant to a particular holder of Rights in light
of such holder's personal investment circumstances nor does this discussion
address special tax implications which may be applicable to certain types of
holders of Rights subject to special treatment under the Code (including,
without limitation, financial institutions, broker-dealers, regulated investment
companies, life insurance companies, tax-exempt organizations, foreign
corporations and non-resident aliens). Moreover, the discussion is limited to
those holders who will hold the Rights and any Common Stock acquired upon the
exercise of Rights, as capital assets within the meaning of Section 1221 of the
Code (generally, property held for investment). No consideration of any aspects
of state, local or foreign taxation is included herein. EXCO has not sought, nor
does it intend to seek, any rulings from the IRS relating to the tax issues
addressed herein, and such issues may be subject to substantial uncertainty
resulting from the lack of definitive judicial or administrative authority and
interpretations applicable thereto.
EACH EXISTING HOLDER OF COMMON STOCK AND EACH PROSPECTIVE HOLDER OF
RIGHTS IS URGED TO CONSULT SUCH PERSON'S OWN TAX ADVISOR AS TO THE SPECIFIC TAX
CONSEQUENCES OF THE RIGHTS OFFERING WITH RESPECT TO SUCH PERSON'S OWN PARTICULAR
TAX SITUATION, INCLUDING THE APPLICATION AND EFFECT OF THE CODE, AS WELL AS
STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
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TAX CONSEQUENCES TO HOLDERS OF RIGHTS
ISSUANCE OF RIGHTS TO EXISTING SHAREHOLDERS
Haynes and Boone, LLP, counsel to EXCO, has rendered an opinion that
the distribution of Rights to holders of Common Stock (the "Existing
Shareholders") should be characterized as a non-taxable distribution under
Section 305(a) of the Code ("Section 305(a) Distribution"), although this matter
is not free from doubt. The issue exists because present law is not clear as to
whether the distribution of Rights to Existing Shareholders would be
characterized as a Section 305(a) Distribution or, alternatively, as a
distribution under Sections 301 and 305(b) of the Code ("Section 301
Distribution"). If the Rights distribution is treated as a Section 301
Distribution, and provided that EXCO does not have positive net earnings during
fiscal 1998, the value of the Rights distributed would be treated as a
nontaxable reduction in the Existing Shareholder's basis in his Common Stock,
and the balance (if any) in excess of such adjusted basis would be taxed as
capital gain.
BASIS OF RIGHTS
If the Rights distribution is properly characterized as a Section
305(a) Distribution, then, except as provided in the following sentence, the tax
basis of Rights received by an Existing Shareholder in the Rights distribution
would be zero. If, however, (i) the Rights distribution constitutes a Section
305(a) Distribution and (ii) either the Rights have a value (on the date of
distribution of the Rights) equal to or greater than 15% of the value of the
shares of Common Stock with respect to which the Rights are distributed or the
Existing Shareholder elects to apply the rule described in this sentence, then
upon exercise or transfer (but not upon lapse) of the Rights, the Existing
Shareholder would reallocate his tax basis in his Common Stock between the
Rights and the Common Stock based on the relative fair market values of each. If
the Rights distribution is treated as a Section 301 Distribution, an Existing
Shareholder would have a tax basis in the Rights equal to (and, assuming that
EXCO does not have positive net earnings during fiscal 1998, the Existing
Shareholder's basis in his Common Stock would be reduced by) the fair market
value of the Rights on the date of the Rights distribution. Persons who acquire
Rights by purchase will have a tax basis in the Rights equal to the purchase
price paid therefor.
HOLDING PERIOD OF RIGHTS
If, the Rights distribution is treated as a Section 305(a)
Distribution, an Existing Shareholder will have a holding period in the Rights
that includes the holding period of the shares of Common Stock to which the
Rights distribution relates. If the Rights distribution is treated as a Section
301 Distribution, the Existing Shareholder would have a holding period in the
Rights that begins on the day following the date of distribution of the Rights.
A holder who acquires Rights by purchase will have a holding period in the
Rights that begins on the date of purchase.
EXERCISE OR SALE OF RIGHTS
A holder of Rights will not be taxed upon exercise of the Rights
regardless of whether the Rights were received in a Section 305(a) Distribution
or a Section 301 Distribution. The holder's tax basis in the shares of Common
Stock received upon exercise will equal (i) his basis in the Rights, plus (ii)
the Subscription Price paid for the Common Stock. The holder's holding period in
the Common Stock will begin on the day following the date of exercise of the
Rights.
Upon a sale of the Rights, a holder of Rights will realize capital gain
or loss equal to the difference between the amount received (if any) for the
Rights and his tax basis in the Rights (determined as described in "-- Basis of
Rights" above). Whether the capital gain or loss constitutes short term, medium
term or long term capital gain or loss will depend on the holder's holding
period of the Rights (determined as described in "-- Holding Period of Rights"
above).
LAPSE OF RIGHTS
A holder of Rights who allows Rights to lapse would have a capital loss
equal to his basis (determined as described in "-- Basis of Rights" above), if
any, in the Rights that lapsed. If the Rights distribution is treated as a
Section 305(a) Distribution, an Existing Shareholder who allows a Right to lapse
will have no basis in the Right and, thus, would realize no capital loss.
SALE OR CASH REDEMPTION OF COMMON STOCK
Upon a sale or cash redemption of shares of Common Stock, a holder who
acquired Rights by purchase and, if (as expected) EXCO has no net earnings
during fiscal 1998, an Existing Shareholder, will generally recognize
60
<PAGE> 63
capital gain or loss in an amount equal to the difference between the amount
received in the sale or redemption and the holder's tax basis (determined as
described in "-- Exercise or Sale of Rights" above) in the shares redeemed.
LEGAL MATTERS
Certain legal matters in connection with the securities offered hereby
will be passed upon for EXCO by Haynes and Boone, LLP, Dallas, Texas.
EXPERTS
The balance sheet of EXCO as of December 31, 1997, and the related
statements of operations, stockholders' equity and cash flows for the year ended
December 31, 1997 included in this Prospectus and incorporated in this
Prospectus by reference from EXCO's Annual Report on Form 10-K for the year
ended December 31, 1997, have been audited by Ernst & Young LLP, independent
auditors, as stated in their report included and incorporated by reference
herein and are included in reliance upon such report given the authority of such
firm as experts in accounting and auditing.
The consolidated balance sheet of EXCO as of December 31, 1996 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the nine months ended December 31, 1995, and the year then ended
December 31, 1996, have been included in this Prospectus and incorporated in
this Prospectus by reference from EXCO's Annual Report on Form 10-K for the year
ended December 31, 1997, have been audited by Belew Averitt, LLP, independent
certified public accountants, as stated in their report included and
incorporated by reference herein and are included in reliance upon such report
given the authority of said firm as experts in accounting and auditing.
The statements of revenues and direct operating expenses in respect of
oil and natural gas properties (the "Maverick County Properties") acquired from
various sellers in February, 1998 for the years ended December 31, 1996 and 1997
included in this Prospectus and incorporated in this Prospectus by reference
from EXCO's Annual Report on Form 10-K for the year ended December 31, 1997,
have been audited by Ernst & Young LLP, independent auditors, as stated in
their reports included and incorporated by reference herein and are included in
reliance upon such reports given the authority of such firm as experts in
accounting and auditing.
The balance sheets of Jacobi-Johnson Energy, Inc., as of December 31,
1996 and 1997, and the related statements of operations, stockholders' equity
and cash flows for the years ended December 31, 1996 and 1997 have been audited
by Ernst & Young LLP, independent auditors, as stated in their report included
in this Prospectus and are included in reliance upon such report given the
authority of such firm as experts in accounting and auditing.
The balance sheets of Gladstone Resources, Inc., as of December 31,
1996 and 1997, and the related statements of operations, stockholders' equity
and cash flows for the three years then ended incorporated in this Prospectus by
reference from Gladstone's Annual Report on Form 10-K dated May 1, 1998, have
been audited by Harold Ratcliff, Certified Public Accountant and independent
auditor, as stated in his report incorporated by reference herein and are
included in reliance upon such report given the authority of such individual as
an expert in accounting and auditing.
The statements of revenues and direct operating expenses in respect of
oil and natural gas properties (the "Dawson County Properties") for the years
ended December 31, 1996 and 1997 included in this Prospectus have been audited
by Ernst & Young LLP, independent auditors, as stated in their report included
herein and are included in reliance upon such report given the authority of such
firm as experts in accounting and auditing.
The reserve estimates presented as of December 31, 1997 with respect to
the Jacobi-Johnson Properties, the reserve estimates presented as of December
31, 1995, 1996 and 1997 with respect to EXCO's historical properties and the
reserve estimates presented as of December 31, 1997 with respect to the
Maverick County Properties and the Dawson County Properties have been prepared
by Lee Keeling and Associates, Inc., independent petroleum engineers, Tulsa,
Oklahoma. Previous reserve estimates as of March 31, 1995 reported herein with
respect to EXCO's historical properties were prepared by Milmac Operating
Company, independent petroleum engineers, Lubbock, Texas.
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<PAGE> 64
ADDITIONAL INFORMATION
EXCO has filed with the Commission a Registration Statement on Form S-2
(the "Registration Statement") under the Securities Act with respect to the
securities offered by this Prospectus. This Prospectus constitutes a part of the
Registration Statement and does not contain all of the information set forth in
the Registration Statement, certain parts of which are omitted from this
Prospectus as permitted by the rules and regulations of the Commission.
Statements made in this Prospectus regarding the contents of any contract,
agreement or other document are not necessarily complete. With respect to each
contract, agreement or other document filed with the Commission as an exhibit to
the Registration Statement, reference is made to the exhibit for further
information regarding the contents thereof, and each such statement is qualified
in its entirety by such reference. For further information regarding EXCO and
the securities offered hereby, reference is made to the Registration Statement,
including the exhibits and schedules thereto.
The Registration Statement, including the exhibits and schedules
thereto, is available for inspection at, and copies of such materials may be
obtained at prescribed rates from, the public reference facilities maintained by
the Commission at its principal offices located at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at its regional offices located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and Seven World Trade Center, 13th Floor, New York, New York 10048. The
Commission maintains a website that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the Commission (http://www.sec.gov).
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Incorporated by reference in this Prospectus, and subject in each case
to information contained in this Prospectus, are the following documents filed
by EXCO with the Commission pursuant to the Exchange Act: (i) EXCO's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997; (ii) EXCO's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998; (iii) EXCO's
Current Report on Form 8-K dated January 14, 1998; (iv) EXCO's Current Report on
Form 8-K dated February 25, 1998, as amended by Form 8-K/A Amendment No. 1 filed
April 8, 1998; (v) EXCO's Current Report on Form 8-K dated May 1, 1998; (vi)
EXCO's Current Report on Form 8-K dated May 8, 1998; and (vii) EXCO's Proxy
Statement dated March 17, 1998.
Incorporated by reference in this Prospectus , and subject in each case
to information contained in this Prospectus, are the following documents filed
by Gladstone with the Commission pursuant to the Exchange Act: (i) Gladstone's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and (ii)
Gladstone's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998
as amended by Quarterly Report on Form 10-Q/A Amendment No. 1 dated July 1,
1998.
EXCO will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon the written or oral
request of such person, a copy of any and all of the documents incorporated by
reference herein (other than exhibits to such documents unless such exhibits are
specifically incorporated by reference in such documents). Such request should
be directed to Attention: Richard E. Miller, General Counsel and Secretary, 5735
Pineland Drive, Suite 235, Dallas, Texas 75231, telephone: (214) 368-2084.
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<PAGE> 66
GLOSSARY OF SELECTED OIL AND NATURAL GAS TERMS
The following are abbreviations and definitions of certain terms
commonly used in the oil and natural gas industry and this Prospectus.
"BBL." One stock tank barrel, or 42 U.S. gallons liquid volume, used
herein in reference to crude oil or other liquid hydrocarbons.
"BEHIND-PIPE." Hydrocarbons in a potentially producing horizon
penetrated by a well bore the production of which has been postponed pending the
production of hydrocarbons from another formation penetrated by the well bore.
These hydrocarbons are classified as proved but nonproducing reserves.
"BOE." Barrel of oil equivalent (converting six Mcf of natural gas to
one Bbl of oil).
"COMPLETED WELL." The completion of a well or a completed well refers
to the installation of permanent equipment for the production of oil or natural
gas, or in the case of a dry hole, the reporting of abandonment to the
appropriate agency.
"DEVELOPED ACREAGE." Acreage spaced or assignable to productive wells.
"DEVELOPMENT WELL." A well drilled within the proven boundaries of an
oil or natural gas reservoir with the intention of completing the stratigraphic
horizon known to be productive.
"DRY HOLE." An exploratory or development well found to be incapable of
producing either oil or natural gas in sufficient economic quantities to
justify completion of a well.
"EXPLORATORY WELL." A well drilled within no proven boundaries of an
oil or natural gas reservoir.
"GROSS ACRE." An acre in which a working interest is owned.
"GROSS WELL(S)." A gross well is a well in which a working interest is
owned. The number of gross wells is the total number of wells in which working
interests are owned.
"INFILL DRILLING." Drilling of a well between known producing wells to
better exploit the reservoir.
"MCF." One thousand cubic feet of natural gas.
"MCFE." One thousand cubic feet of natural gas equivalent (converting
one Bbl of oil to six Mcf of natural gas).
"NET ACRE(S)." A net acre is deemed to exist when the sum of fractional
ownership working interests in gross acres equals one. The total of net acres is
the sum of the fractional working interests owned in gross acres expressed as
whole numbers and percentages thereof.
"NET WELL(S)." A net well is deemed to exist when the sum of the
fractional ownership working interests in gross wells equals one. The number of
net wells is the sum of the fractional working interests owned in gross wells
expressed as whole numbers and percentages thereof.
"OVERRIDING ROYALTY INTEREST." An interest in an oil and/or natural gas
property entitling the owner to a share of oil and natural gas production free
of costs of production.
"PRESENT VALUE OF ESTIMATED FUTURE NET REVENUES." The present value of
estimated future net revenues is an estimate of future net revenues from a
property at its acquisition date, at December 31, 1997, or as otherwise
indicated, after deducting production and ad valorem taxes, future capital costs
and operating expenses, but before deducting federal income taxes. The future
net revenues have been discounted at an annual rate of 10% to determine
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<PAGE> 67
their "present value." The present value is shown to indicate the effect of time
on the value of the net revenue stream and should not be construed as being the
fair market value of the properties. Estimates have been made using constant oil
and natural gas prices and operating costs at the acquisition date, at December
31, 1997, or as otherwise indicated. EXCO believes that the present value of
estimated future net revenues before income taxes, while not in accordance with
generally accepted accounting principles, is an important financial measure used
by investors and independent oil and natural gas producers for evaluating the
relative significance of oil and natural gas properties and acquisitions.
"PRODUCING WELL," "PRODUCTION WELL" or "PRODUCTIVE WELL." A well that
is producing oil or natural gas or that is capable of production.
"PROVED DEVELOPED RESERVES." Proved developed reserves are oil and gas
reserves that can be expected to be recovered through existing wells with
existing equipment and operating methods. Additional oil and gas expected to be
obtained through the application of fluid injection or other improved recovery
techniques for supplementing the natural forces and mechanisms of primary
recovery should be included as "proved developed reserves" only after testing by
a pilot project or after the operation of an installed program has confirmed
through production response that increased recovery will be achieved.
"PROVED RESERVES." The estimated quantities of crude oil, natural gas
and NGLs which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions.
"PROVED UNDEVELOPED RESERVES." Proved undeveloped reserves are oil and
gas reserves that are expected to be recovered from new wells on undrilled
acreage, or from existing wells where a relatively major expenditure is required
for recompletion. Reserves on undrilled acreage shall be limited to those
drilling units offsetting productive units that are reasonably certain of
production when drilled. Proved reserves for other undrilled units can be
claimed only where it can be demonstrated with certainty that there is
continuity of production from the existing productive formation. Under no
circumstances should estimates for proved undeveloped reserves be attributable
to any acreage for which an application of fluid injection or other improved
recovery techniques is contemplated, unless such techniques have been proved
effective by actual tests in the area and in the same reservoir.
"SEC PV-10." The discounted future net cash flows for proved oil and
natural gas reserves computed on the same basis as the Standardized Measure, but
without deducting income taxes, which is not in accordance with generally
accepted accounting principles. SEC PV-10 is an important financial measure for
evaluating the relative significance of oil and natural gas properties and
acquisitions, but should not be construed as an alternative to the Standardized
Measure (as determined in accordance with generally accepted accounting
principles).
"UNDEVELOPED ACREAGE." As defined by the Commission, undeveloped
acreage is considered to be lease acreage on which wells have not been drilled
or completed to a point that would permit the production of commercial
quantities of oil and natural gas regardless of whether such acreage contains
proved reserves.
"WORKING INTEREST." The operating interest that gives the owner the
right to drill, produce and conduct operating activities on the property and to
a share of production, subject to all royalties, overriding royalties and other
burdens and to all costs of exploitation, development and operations and all
risks in connection herewith.
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EXCO RESOURCES, INC.
INDEX TO FINANCIAL STATEMENTS
Contents
<TABLE>
<S> <C>
Audited Financial Statements
Reports of Independent Auditors............................................ F-2
Balance Sheets............................................................. F-4
Statements of Operations................................................... F-5
Statements of Cash Flows................................................... F-6
Statements of Changes in Stockholders' Equity.............................. F-7
Notes to Financial Statements.............................................. F-8
Pro Forma Combined Condensed Financial Statements (unaudited)
Pro Forma Combined Condensed Balance Sheet................................. F-22
Pro Forma Combined Condensed Statements of Operations...................... F-23
Notes to Unaudited Pro Forma Combined Condensed Financial Statements....... F-25
Financial Statements of Businesses Acquired
Maverick County Properties:
Report of Independent Auditors............................................. F-30
Statements of Operating Revenues and Direct Operating Expenses............. F-31
Notes to Statements of Operating Revenues and Direct Operating Expenses.... F-32
Jacobi-Johnson Energy, Inc.:
Report of Independent Auditors............................................. F-34
Balance Sheets............................................................. F-35
Statements of Operations................................................... F-36
Statements of Cash Flows................................................... F-37
Statements of Changes in Stockholders' Equity.............................. F-38
Notes to Financial Statements.............................................. F-39
Dawson County Properties:
Report of Independent Auditors............................................. F-46
Statements of Operating Revenues and Direct Operating Expenses............. F-47
Notes to Statements of Operating Revenues and Direct Operating Expenses.... F-48
</TABLE>
F-1
<PAGE> 69
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
EXCO Resources, Inc.
We have audited the accompanying balance sheet of EXCO Resources, Inc., as of
December 31, 1997, and the related statements of operations, cash flows, and
changes in stockholders' equity for the year then ended. These financial
statements are the responsibility of EXCO's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of EXCO Resources, Inc., at
December 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
As explained in Note 2 to the financial statements, EXCO Resources, Inc. has
given retroactive effect to the change in accounting for oil and natural gas
properties from the successful efforts method to the full cost method.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Dallas, Texas
February 11, 1998 , except for
the second paragraph of Note 10,
as to which the date is March 31, 1998
F-2
<PAGE> 70
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
EXCO Resources, Inc.
We have audited the accompanying balance sheet of EXCO Resources, Inc. as of
December 31, 1996, and the related statements of operations, cash flows and
changes in stockholders' equity for the nine months ended December 31, 1995 and
year ended December 31, 1996. These financial statements are the responsibility
of EXCO'S management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of EXCO Resources, Inc. as of
December 31, 1996, and the results of its operations and its cash flows for the
nine months ended December 31, 1995 and year ended December 31, 1996, in
conformity with generally accepted accounting principles.
As explained in Note 2 to the financial statements, EXCO Resources, Inc. has
given retroactive effect to the change in accounting for all oil and gas
properties from the successful efforts method to the full cost method.
/s/ BELEW AVERITT LLP
BELEW AVERITT LLP
Dallas, Texas
March 13, 1997, except Note 2, as to
which the date is February 11, 1998
and Note 10, second paragraph, as to
which the date is March 31, 1998.
F-3
<PAGE> 71
EXCO RESOURCES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31, March 31,
---------------------------- ---------------
1996 1997 1998
------------- ------------- ---------------
ASSETS (unaudited)
<S> <C> <C> <C>
Current assets:
Cash .............................................................. $ 46 $ 496 $ 52
Accounts receivables:
Oil and natural gas sales ..................................... 155 71 69
Joint interest ................................................ 171 155 113
Other ............................................................. 1 5 22
------- ------- -------
Total current assets ..................................... 373 727 256
Oil and natural gas properties (full cost accounting method):
Undeveloped oil and natural gas properties ........................ 55 36 32
Proved developed oil and natural gas properties ................... 5,997 4,267 5,103
------- ------- -------
6,052 4,303 5,135
Allowance for depreciation, depletion, and amortization ........... (5,303) (3,830) (3,860)
------- ------- -------
Oil and natural gas properties, net ............................... 749 473 1,275
Office and field equipment, net ........................................ 104 70 134
Deferred financing costs ............................................... -- -- 89
------- ------- -------
Total assets ............................................. $ 1,226 $ 1,270 $ 1,754
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 352 $ 262 $ 330
Joint interest prepayments ........................................ 31 -- --
Revenues and royalties payable .................................... 95 50 27
Note payable ...................................................... 150 -- --
Current maturities of long-term debt .............................. 30 16 15
------- ------- -------
Total current liabilities ................................ 658 328 372
Long-term debt, less current maturities ................................ 36 15 612
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 10,000,000
Outstanding shares - None ..................................... -- -- --
Common stock, $.02 par value:
Authorized shares - 25,000,000
Issued and outstanding shares - 402,650, 502,650 and 508,900
at December 31, 1996 and 1997, and March 31, 1998, respectively 8 10 10
Additional paid-in capital ........................................ 9,118 9,716 954
Deficit eliminated ................................................ -- (8,799) --
Retained earnings (deficit), as adjusted for quasi-reorganization
at December 31, 1997 .......................................... (8,594) -- (194)
------- ------- -------
Total stockholders' equity ............................... 532 927 770
------- ------- -------
Total liabilities and stockholders' equity ............... $ 1,226 $ 1,270 $ 1,754
======= ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 72
EXCO RESOURCES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Nine Months Three Months
Ended Year Ended Ended
December 31, December 31, March 31,
------------ ---------------------- --------------------------
1995 1996 1997 1997 1998
------------ ------- -------- ------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Revenues:
Oil and natural gas ................................ $ 560 $ 872 $ 670 $ 219 $ 173
Other income ....................................... 76 39 38 11 10
Gain (loss) on disposition of property and
equipment......................................... -- -- (10) --
------- ------- ------- ------- -------
Total revenues ............................ 636 911 698 230 183
Cost and expenses:
Oil and natural gas production ..................... 333 429 322 99 95
Depreciation, depletion and amortization ........... 92 114 84 28 36
General and administrative ......................... 366 373 486 106 239
Abandoned acquisition .............................. -- 303 -- -- --
Interest ........................................... 5 18 11 5 7
------- ------- ------- ------- -------
Total cost and expenses ................... 796 1,237 903 238 377
------- ------- ------- ------- -------
Loss before income taxes ................................ (160) (326) (205) (8) (194)
Income tax expense (benefit) ............................ -- -- -- -- --
------- ------- ------- ------- -------
Net loss ................................................ $ (160) $ (326) $ (205) $ (8) $ (194)
======= ======= ======= ======= =======
Basic and diluted loss per share ........................ $ (.47) $ (.85) $ (.51) $ (.02) $ (.38)
======= ======= ======= ======= =======
Weighted average number of common and
common equivalent shares outstanding .................. 338 383 403 403 509
======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 73
EXCO RESOURCES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Three Months
Ended Year Ended Ended
December 31, December 31, March 31,
------------ ---------------------- ------------------------
1995 1996 1997 1977 1998
------------ ---------- --------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net loss ................................................ $ (160) $ (326) $ (205) $ (8) $ (194)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation, depletion and amortization ........... 92 114 84 28 36
Stock compensation expense ......................... -- 23 -- --
Loss (gain) on disposition and abandonment of
property and equipment ........................... 36 2 10 --
Effect of changes in:
Accounts receivable ............................ 71 34 100 2 44
Other current assets ........................... -- -- (4) 1 (17)
Accounts payable and other current liabilities: (1) (155) (166) 53 45
--------- ---------- -------- ------ -------
Net cash provided by (used in) operating activities ..... 38 (308) (181) 76 (86)
Investing Activities:
Additions to property and equipment ..................... (183) (27) (100) (25) (869)
Proceeds from disposition of property and equipment ..... 39 3 304 35 4
--------- ---------- -------- ------ -------
Net cash provided by (used in) investing activities ..... (144) (24) 204 10 (865)
Financing Activities:
Proceeds from note payable and long-term debt ........... 300 150 -- -- 600
Payments on long-term debt .............................. (119) (18) (23) (8) (4)
Payments on note payable ................................ -- (200) (150) (25) --
Proceeds from issuance of common stock .................. -- 225 600 -- --
Deferred financing costs ................................ -- -- -- -- (89)
--------- ---------- -------- ------ -------
Net cash provided by (used in) financing activities ..... 181 157 427 (33) 507
--------- ---------- -------- ------ -------
Net increase (decrease) in cash ......................... 75 (175) 450 53 (444)
Cash at beginning of period ............................. 146 221 46 46 496
--------- ---------- -------- ------ -------
Cash at end of period ................................... $ 221 $ 46 $ 496 $ 99 $ 52
========= ========== ======== ====== =======
Supplemental Cash Flow Information:
Interest paid ........................................... $ 5 $ 18 $ 11 $ 5 $ 7
========= ========== ======== ====== =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 74
EXCO RESOURCES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock
---------------------
Additional Retained Total
Number of Paid-In Earnings Stockholders'
Shares Amount Capital (Deficit) Equity
--------- ------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance on April 1, 1995 .................... 338 $ 7 $ 8,871 $ (8,108) $ 770
Net loss ............................... -- -- -- (160) (160)
----- ------- ---------- -------- -------------
Balance on December 31, 1995 ................ 338 7 8,871 (8,268) 610
Shares issued upon exercise
of stock options ..................... 60 1 224 -- 225
Common stock issued .................... 5 0 23 -- 23
Net loss ............................... -- -- -- (326) (326)
----- ------- ---------- -------- -------------
Balance on December 31, 1996 ................ 403 8 9,118 (8,594) 532
Common stock issued .................... 100 2 598 -- 600
Net loss ............................... -- -- -- (205) (205)
Adjustment for quasi-reorganization
as of December 31, 1997 .............. -- -- (8,799) 8,799 --
----- ------- ---------- -------- -------------
Balance on December 31, 1997 ................ 503 10 917 -- 927
Common stock issued (unaudited) ........ 6 0 37 -- 37
Net loss (unaudited) ................... -- -- -- (194) (194)
----- ------- ---------- -------- -------------
Balance on March 31, 1998 (unaudited) ....... 509 $ 10 $ 954 $ (194) $ 770
===== ======= ========== ======== =============
</TABLE>
See accompanying notes.
F-7
<PAGE> 75
EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Information subsequent to December 31, 1997, and for the
three months ended March 31, 1998, is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
EXCO, a Texas corporation, was formed in 1955. EXCO's operations consist
primarily of acquiring interests in producing oil and natural gas properties
located in the continental United States. EXCO also acts as the operator on
certain of these properties and receives overhead reimbursement fees as a
result.
On December 19, 1997, a new stockholder (the "Buyer") took control of EXCO and
its management under an option agreement, and a separate stock purchase
agreement between the Buyer and certain shareholders of EXCO (the "Sellers"),
whereby the Buyer purchased certain outstanding common stock from the Sellers.
QUASI-REORGANIZATION
Effective December 31, 1997, EXCO effected a quasi-reorganization through the
application of $8,799,000 of its additional paid-in capital account to eliminate
its accumulated deficit. EXCO's Board of Directors decided to effect a
quasi-reorganization given the change in management, the infusion of new equity
capital and an increase in activities. EXCO's accumulated deficit was primarily
related to past operations and properties that have been disposed of. The
historical carrying values of the assets and liabilities of EXCO were not
required to be adjusted in connection with the quasi-reorganization.
YEAR-END CHANGE
On February 13, 1996, EXCO changed its fiscal year-end from March 31 to December
31 effective December 31, 1995.
MANAGEMENT ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, EXCO is required to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses during
the reporting period. Actual results may differ from management's estimates.
CASH EQUIVALENTS
EXCO considers all highly liquid investments with maturities of 3 months or less
when purchased to be cash equivalents.
CONCENTRATION OF CREDIT RISK AND ACCOUNTS RECEIVABLE
Financial instruments that potentially subject EXCO to concentration of credit
risk consist principally of cash and trade receivables. EXCO places its cash
with high credit quality financial institutions. EXCO sells oil and natural gas
to various customers. In addition, EXCO participates with other parties in the
drilling, completion, and operation of oil and natural gas wells. Substantially
all of EXCO's accounts receivable are due from either purchasers of oil, natural
gas, or natural gas liquids or participants in oil and natural gas wells for
which EXCO serves as the operator. Generally, operators of oil and natural gas
properties have the right to offset future revenues against unpaid charges
related to operated wells. Oil and natural gas sales are generally unsecured.
Credit losses are provided for in the financial statements and have been within
management's expectations. The allowance for doubtful accounts receivable
aggregated $20,000 and $18,000 at December 31, 1996 and 1997, respectively.
F-8
<PAGE> 76
EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Information subsequent to December 31, 1997, and for the
three months ended March 31, 1998, is unaudited)
OIL AND NATURAL GAS PROPERTIES
Oil and natural gas properties are recorded at cost using the full cost method
of accounting, as prescribed by the Securities and Exchange Commission (the
"SEC"). Under the full cost method, all costs associated with the acquisition,
exploration or development of oil and natural gas properties are capitalized as
part of the full cost pool.
Depreciation, depletion, and amortization of evaluated oil and natural gas
properties are provided using the unit-of-production method based on total
proved reserves, as determined by independent petroleum reservoir engineers.
Sales, dispositions, and other oil and natural gas property retirements are
accounted for as adjustments to the full cost pool, with no recognition of gain
or loss unless such disposition would significantly alter the amortization rate.
OFFICE AND FIELD EQUIPMENT
Office and field equipment are capitalized at cost and depreciated on a straight
line basis over their estimated useful lives.
REVENUE RECOGNITION
EXCO uses the sales method of accounting for oil and gas revenues. Under the
sales method, revenues are recognized based on actual volumes of oil and gas
sold to purchasers.
OVERHEAD REIMBURSEMENT FEES
Fees from overhead charges billed to working interest owners, including EXCO, of
$115,000, $138,000, and $136,000 for the nine months ended December 31, 1995,
and for the years ended December 31, 1996 and 1997, respectively, have been
classified as a reduction of general and administrative expenses in the
accompanying statements of operations. For the nine months ended December 31,
1995 and the year ended December 31, 1996, these amounts were previously shown
as revenues.
INCOME TAXES
Deferred income taxes are accounted for using the liability method in accounting
for income taxes.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated, to conform to the Statement 128
requirements. The effect of the adoption of Statement No. 128 did not have a
material impact.
F-9
<PAGE> 77
EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Information subsequent to December 31, 1997, and for the
three months ended March 31, 1998, is unaudited)
REVERSE STOCK SPLITS
At EXCO's 1998 Annual Meeting of Shareholders, the shareholders of EXCO approved
an amendment to EXCO's Restated Articles of Incorporation authorizing a
one-for-two reverse stock split of EXCO's common stock, which became effective
March 31, 1998. At EXCO's 1996 Annual Meeting of Shareholders, the shareholders
of EXCO approved an amendment to EXCO's Articles of Incorporation authorizing a
one-for-five reverse stock split of EXCO's common stock, which became effective
July 19, 1996. All share and per share numbers contained herein have been
retroactively adjusted to record the effects of the reverse stock splits. (See
Note 10).
PREFERRED STOCK
At the 1996 Annual Meeting, the shareholders also authorized the issuance of up
to 10,000,000 shares of preferred stock, $.01 par value per share (the
"Preferred Stock"), that the Board of Directors may issue from time to time in
one or more series. With respect to each series of Preferred Stock, the
amendment authorizes the Board to fix and determine by resolution the number of
shares of each series, the designation thereof and all rights and preferences
including voting, dividend, conversion, redemption and liquidation rights. The
Board of Directors deemed it in the best interest of EXCO to provide for
corporate planning and to have shares available for future equity financings
through issuance to the general public, future acquisitions, stock dividends or
splits or for other corporate purposes for which the issuance of preferred
shares may be advisable.
INTERIM FINANCIAL STATEMENT PRESENTATION
In management's opinion, the accompanying interim financial statements contain
all adjustments (consisting solely of normal recurring accruals) necessary to
present fairly the financial position of EXCO as of March 31, 1998, the results
of operations for the three month periods ended March 31, 1997 and 1998, and the
cash flows for the three month periods ended March 31, 1997 and 1998.
The results of operations for the three months ended March 31, 1998, are not
necessarily indicative of the results expected for the full year.
2. CHANGE IN METHOD OF ACCOUNTING FOR OIL AND NATURAL GAS OPERATIONS
In the fourth quarter of 1997, EXCO changed from the successful efforts method
to the full cost method of accounting for its oil and natural gas operations.
All prior year's financial statements presented herein have been restated to
reflect the change.
During the past ten years, EXCO has incurred minimal exploration and acquisition
costs, has liquidated substantially all its properties and in 1987 and 1988
completed certain "out of court" debt restructurings. Recently there was a
change in control of ownership of EXCO and new management was appointed. New
management views EXCO as a new company and believes the past operations are
insignificant and not relevant to EXCO's future plans.
New management believes that the change in accounting for oil and natural gas
properties is to a preferable method because the full cost method will more
appropriately reflect EXCO's future operations which will result from the
significant management changes at EXCO. Further, new management does not believe
that the use of the successful efforts method of accounting is appropriate for a
small to medium size acquisition, development and exploitation company.
F-10
<PAGE> 78
EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Information subsequent to December 31, 1997, and for the
three months ended March 31, 1998, is unaudited)
The financial statements have been restated to apply the new accounting method
retroactively. The effect of the accounting change on the results of operations
for the nine months ended December 31, 1995 and the year ended December 31, 1996
are as follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
December 31, 1995 December 31, 1996
----------------- -----------------
<S> <C> <C>
Statements of Operations:
Net loss as previously reported........................................ $ (344) $ (329)
Adjustment for effect of a change in accounting principle
that is applied retroactively.................................... 184 3
---------- ---------
Net loss as adjusted................................................... $ (160) $ (326)
========== =========
Per share amounts:
Net loss as previously reported........................................ $ (1.02) $ (.85)
Adjustment for effect of a change in accounting principle
that is applied retroactively.................................... .55 --
---------- ---------
Net loss as adjusted................................................... $ (.47) $ (.85)
========== =========
Common shares used in per share calculation............................ 338 383
========== =========
Statements of Changes in Stockholders' Equity:
Balance at beginning of period as previously reported.................. $ 974
Add adjustment to retained earning (deficit) for the cumulative
effect on prior years of applying retroactively the full
cost method....................................................... (204)
----------
Balance at beginning of period, as adjusted............................ 770 $ 610
Net loss............................................................... (160) (326)
Shares issued upon exercise of stock options........................... -- 225
Common stock issued.................................................... -- 23
---------- ---------
Balance at end of year................................................. $ 610 $ 532
========== =========
</TABLE>
The change in accounting method did not have a material impact on the
results of operations for the year ended December 31, 1997.
3. LONG-TERM DEBT
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1997
-------- --------
<S> <C> <C>
Notes payable...................................................... $ 66 $ 31
Less current maturities............................................ (30) (16)
-------- --------
Long-term debt..................................................... $ 36 $ 15
======== ========
</TABLE>
NATIONSBANK CREDIT AGREEMENT
On February 11, 1998, EXCO entered into a credit agreement with NationsBank of
Texas, N.A., ("NationsBank") (the "Credit Agreement"). The Credit Agreement has
a notional amount to $50 million, subject to borrowing base limitations, based
on the value of EXCO's oil and gas properties, as determined by the lenders from
time to time.
F-11
<PAGE> 79
EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Information subsequent to December 31, 1997, and for the
three months ended March 31, 1998, is unaudited)
Under the Credit Agreement, EXCO is required to pay a fee equal to .25% on any
accepted increase in the borrowing base in excess of the previously determined
borrowing base and a commitment fee of .30% to .425% based on the ratio of
outstanding credit to the borrowing base. The maturity date of the Credit
Agreement is February 11, 2000.
The Credit Agreement provides that if EXCO's outstanding credit is less than $5
million, then EXCO's interest rate would be LIBOR plus 1.5%. If EXCO's
outstanding credit is greater than $5 million, then the Credit Agreement
provides that EXCO's interest rate would range from NationsBank's prime rate to
LIBOR plus between 1% and 1.75% based on the ratio of outstanding credit to the
borrowing base.
There are no scheduled principal payments due on the Credit Agreement until
maturity. However, the borrowing base will be redetermined on or around April 1
and October 1 of each year. A borrowing base deficiency is created in the event
that the outstanding loan balances exceed the borrowing base, as determined by
the lenders in their sole discretion. Upon such event the borrowing base
deficiency must be repaid by (i) mandatory reductions of the deficiency over a
period of not more than 6 months; (ii) making a lump sum payment equal to the
deficiency; or (iii) providing additional collateral acceptable to lenders in
their sole discretion sufficient to increase the borrowing base and eliminate
the deficiency.
Borrowings under the Credit Agreement are secured by first and prior liens
covering 90% of the recognized value of all proved mineral interests owned by
EXCO. The Credit Agreement contains various restrictive covenants, including
limitations on the granting of liens, restrictions on the issuance of additional
debt, requirements to maintain a net worth of at least $.5 million and to
maintain a current ratio of not less than 1.0 to 1.0, and currently prohibits
the payment of dividends on EXCO's capital stock. On December 31, 1997, if the
Credit Facility had been outstanding at that time, EXCO would have been in
compliance with both the Current Ratio and the Consolidated Tangible Net Worth
covenants. On March 31, 1998, EXCO was in compliance with the Consolidated
Tangible Net Worth covenant, but was not in compliance with the Current Ratio
covenant. On May 15, 1998, NationsBank waived EXCO's noncompliance with the
Current Ratio at March 31, 1998. On May 15, 1998, EXCO was in compliance with
both the Current Ratio and the Consolidated Tangible Net Worth covenants. EXCO
believes, but cannot assure, that it will be able to comply with all restrictive
covenants in the future.
4. INCOME TAXES
At December 31, 1997, EXCO has net operating loss carryforwards ("NOLs") for
income tax purposes that expire beginning in 1998. Utilization of the NOLs is
significantly restricted because of a change in ownership, as defined by the Tax
Reform Act of 1986, of EXCO, which occurred December 19, 1997, as described in
Note 1. EXCO estimates that approximately $1.9 million of the NOLs will become
available in the future at the rate of approximately $127,000 per year through
2012. EXCO also has available statutory depletion carryforwards of approximately
$927,000. For financial reporting purposes, a valuation allowance has been
recognized to offset the deferred tax assets related to carryforwards prior to
EXCO's quasi-reorganization. When realized, the tax benefit for those
carryforwards will be credited to additional paid-in capital.
F-12
<PAGE> 80
EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Information subsequent to December 31, 1997, and for the
three months ended March 31, 1998, is unaudited)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
EXCO's deferred tax liabilities and assets are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1997
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Book basis of oil and natural gas properties in excess of tax basis ... $ 136 $ 189
------- -------
Total deferred tax liabilities .................................... 136 189
Deferred tax assets:
Net operating loss carryforwards ...................................... 2,375 649
Credit carryforwards .................................................. 122 36
Statutory depletion carryforwards ..................................... 315 315
Other ................................................................. 7 6
Valuation allowance for deferred tax assets ........................... (2,683) (817)
------- -------
Total deferred tax assets ......................................... 136 189
Net deferred tax liabilities .......................................... $ -- $ --
======= =======
</TABLE>
The following is a reconciliation, stated as a percentage of pretax income
(loss) taxable at the corporate level, of the U.S. statutory federal income tax
rate to EXCO's effective tax rate:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
U.S. federal statutory rate....................... 34% 34% 34%
Adjustments to the valuation allowance............ (34%) (34%) (34%)
--- --- ---
Effective tax rate -- -- --
=== === ===
</TABLE>
5. COMMON STOCK OPTIONS
EXCO applies Accounting Principles Board Opinion 25 in accounting for its fixed
and performance-based stock compensation plans and disclosure requirements of
SFAS 123. Accordingly, no compensation costs have been recognized for either of
the plans.
During the nine month period ended December 31, 1995, EXCO issued 120,000
options to purchase EXCO Common Stock at $1.875 per share. These options were
exercised in 1996. In December 1997, as part of the change in control described
in Note 1, all outstanding options under EXCO's stock option plan and directors
option plan were canceled.
6. RELATED PARTY TRANSACTIONS
In the past, certain directors of EXCO, and the companies with which they are
affiliated, participated in oil and natural gas joint ventures with EXCO upon
the same terms and conditions as unrelated parties. In addition, EXCO had
purchased certain oil and natural gas prospects as well as drilling services and
oil field supplies and services in the normal course of business from companies
in which certain directors have financial interest. No significant purchases
were made during the nine month period ended December 31, 1995, and the years
ended December 31, 1996 and 1997.
F-13
<PAGE> 81
EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Information subsequent to December 31, 1997, and for the
three months ended March 31, 1998, is unaudited)
7. COMMITMENTS AND CONTINGENCIES
EXCO leased office space under an operating lease that expired in November,
1996. Rent expense was approximately $32,000, $41,000 and $63,000 for the nine
months ended December 31, 1995, and the years ended December 31, 1996 and 1997,
respectively. As of December 31, 1997, EXCO moved its offices to a new location
under an operating lease that expires in December, 1999. The rent under the new
lease is $6,440 per month plus a CPI increase in year two.
EXCO had entered into an employment agreement with Mr. Charles Gleeson for the
position of President and Chief Executive Officer of EXCO. The agreement
provided for a minimum annual salary, adjusted for incentives, as determined by
the Board of Directors for the period June 1, 1996 through June 1, 1999. EXCO
had thought to terminate the employment agreement if EXCO was unsuccessful in
raising a minimum of $9,000,000 in a registered public offering. Mr. Gleeson's
employment agreement was terminated in December 1997, as a result of the change
in control described in Note 1.
8. ENVIRONMENTAL REGULATION
Various Federal, state and local laws and regulations covering discharge of
materials into the environment, or otherwise relating to the protection of the
environment, may affect EXCO's operations and costs of oil and natural gas
exploitation, development and production operations. It is not anticipated that
EXCO will be required in the near future to expend amounts material in relation
to the financial statements taken as a whole by reason of environmental laws and
regulations. Because such laws and regulations are constantly being changed,
EXCO is unable to predict the conditions and other factors, over which EXCO does
not exercise control, that may give rise to environment liabilities.
9. ABANDONED ACQUISITION
In September 1996, EXCO entered into a stock purchase agreement to acquire
Taurus Energy Corp. ("Taurus"), a processor and marketer of natural gas. In
addition, EXCO initiated a public stock offering to raise the $35,000,000
necessary to complete the acquisition.
In connection with these activities, EXCO incurred and capitalized approximately
$303,000 of legal, accounting and other costs. In the fourth quarter of 1996,
EXCO recognized the abandonment of the proposed Taurus acquisition and canceled
its planned public offering. As a result, EXCO expensed the costs associated
with these actions.
10. SUBSEQUENT EVENTS
In addition to the financing agreement described in Note 3, on February 11,
1998, EXCO acquired from Osborne Oil Company, Gypsy Production Company, and
other working interest owners, certain oil and natural gas properties in
Maverick County, Texas (the "Maverick County Properties"). The Maverick County
Properties include 9 gross (7.0 net) producing wells and 2 gross (1.87 net)
non-producing wells which may require recompletions, workovers or abandonment.
The Maverick County Properties include 360 gross (280 net) developed acres and
3,384 gross (2,843 net) undeveloped acres. The purchase price consisted of cash
of approximately $760,200. Operating revenues for the acquired properties for
1997 were $279,000.
F-14
<PAGE> 82
EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, and for the
three months ended March 31, 1998, is unaudited)
At EXCO's 1997 Annual Meeting of Shareholders held on March 31, 1998, the
shareholders of EXCO approved an amendment to EXCO's Restated Articles of
Incorporation authorizing a one-for-two reverse stock split of EXCO's common
stock, which became effective March 31, 1998. All share and per share numbers
contained herein have been retroactively adjusted to record the effects of the
reverse stock split.
11. Oil and Natural Gas Producing Activities
The results of operations from EXCO's oil and natural gas producing activities
are as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
---------------- ---------------------------
1995 1996 1997
---------------- ------------- -------------
<S> <C> <C> <C>
Oil and natural gas sales............................ $ 560 $ 872 $ 670
Production costs..................................... (333) (429) (322)
Depreciation, depletion and amortization............. (75) (87) (63)
Income tax expense................................... -- -- --
---------------- ------------- -------------
$ 152 $ 356 $ 285
================ ============= =============
</TABLE>
Costs incurred in oil and natural gas producing activities are as follows (in
thousands, except per equivalent barrel amounts):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
---------------- ---------------------------
1995 1996 1997
---------------- ------------- -------------
<S> <C> <C> <C>
Property acquisition costs........................... $ 56 $ 2 $ 2
Development costs.................................... 71 17 74
Exploration costs.................................... 37 -- --
Production costs..................................... 333 429 322
Depreciation, depletion and amortization 1.54 1.46 1.41
per equivalent barrel...........................
</TABLE>
All of EXCO's oil and natural gas revenues are produced from a limited number
of wells or properties which are located in the United States.
EXCO's oil and natural gas production is sold to various purchasers. During the
nine months ended December 31, 1995, sales of oil and natural gas to 3
purchasers accounted for 20%, 13% and 10% of consolidated gross revenues,
respectively. During the year ended December 31, 1996, sales of oil and natural
gas to 2 purchasers accounted for 26% and 15% of consolidated gross revenues,
respectively. During the year ended December 31, 1997, sales of oil and natural
gas to 3 purchasers accounted for 22%, 19% and 14% of consolidated gross
revenues, respectively.
F-15
<PAGE> 83
EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, and for the
three months ended March 31, 1998, is unaudited)
Management believes that the loss of these purchasers would not have a material
impact on EXCO's consolidated financial condition or results of operations.
In an effort to reduce the effects of the volatility of the price of crude oil
and natural gas on EXCO's operations, management has adopted a policy of hedging
oil and natural gas prices whenever such prices are in excess of the prices
anticipated in EXCO's operating budget and profit plan through the use of
commodity futures, options, and swap agreements. Hedging transactions require
the approval of the Board of Directors. There were no outstanding contracts at
December 31, 1997.
12. Supplemental Oil and Natural Gas Reserve and Standardized Measure
Information (Unaudited)
EXCO retains independent engineering firms to provide annual year-end estimates
of EXCO's future net recoverable oil, natural gas, and natural gas liquids
reserves. Estimated proved net recoverable reserves as shown below include only
those quantities that can be expected to be commercially recoverable at prices
and costs in effect at the balance sheet dates under existing regulatory
practices and with conventional equipment and operating methods. Proved
developed reserves represent only those reserves to be recovered through
existing wells. Proved undeveloped reserves include those reserves expected to
be recovered from new wells on undrilled acreage or from existing wells on which
a relatively major expenditure is required for recompletion.
Estimated Quantities of Proved Reserves
<TABLE>
<CAPTION>
OIL (BBL) GAS (MCF) BOE*
----------------- --------------- ----------------
(In thousands)
<S> <C> <C> <C>
March 31, 1995.................................................... 237 2,851 712
Purchase of reserves in place ................................ 8 2,152 367
New discoveries and extensions................................ 13 118 32
Revisions of previous estimates............................... (91) 16 (88)
Production.................................................... (19) (180) (49)
Sales of reserves in place.................................... -- -- --
----------------- --------------- ----------------
December 31, 1995................................................. 148 4,957 974
Purchase of reserves in place................................. 2 263 46
New discoveries and extensions................................ 3 -- 3
Revisions of previous estimates............................... 63 (222) 26
Production.................................................... (22) (224) (59)
Sales of reserves in place.................................... (25) (12) (27)
----------------- --------------- ----------------
December 31, 1996................................................. 169 4,762 963
Purchase of reserves in place................................. -- -- --
New discoveries and extensions................................ -- -- --
Revisions of previous estimates............................... (16) (255) (59)
Production.................................................... (14) (181) (44)
Sales of reserves in place.................................... (81) -- (81)
----------------- --------------- ----------------
December 31, 1997................................................. 58 4,326 779
================= =============== ================
</TABLE>
F-16
<PAGE> 84
EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, and for the
three months ended March 31, 1998, is unaudited)
Estimated Quantities of Proved Developed Reserves
<TABLE>
<CAPTION>
OIL (BBL) GAS (MCF) BOE*
----------------- ---------------- ---------------
(In thousands)
<S> <C> <C> <C>
December 31, 1995................................................. 141 2,818 611
December 31, 1996................................................. 162 2,483 576
December 31, 1997................................................. 57 2,341 447
</TABLE>
* Boe - Barrels of oil equivalent calculated by converting 6 Mcf of natural gas
to 1 Bbl of oil.
The following is a summary of a Standardized Measure of discounted net cash
flows related to EXCO's proved oil, natural gas, and natural gas liquids
reserves. The information presented is based on a valuation of proved reserves
using discounted cash flows based on year-end prices, costs, and economic
conditions and a 10% discount rate. The additions to proved reserves from new
discoveries and extensions could vary significantly from year to year;
additionally, the impact of changes to reflect current prices and costs of
reserves proved in prior years could also be significant. Accordingly, the
information presented below should not be viewed as an estimate of the fair
value of EXCO's oil and natural gas properties, nor should it be considered
indicative of any trends.
Standardized Measure of Discounted Future Net Cash Flows
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1996 1997
-----------------------------------
(In thousands)
<S> <C> <C>
Future cash inflows............................................................. $ 20,296 $ 10,115
Future production costs......................................................... 4,720 2,461
Future development costs........................................................ 930 669
Future income taxes............................................................. -- 283
----------------- -----------------
Future net cash flows .......................................................... 14,646 6,702
Discount of future net cash flows at 10% per annum.............................. 6,327 2,837
----------------- -----------------
Standardized Measure of discounted future net cash flows........................ $ 8,319 $ 3,865
================= =================
</TABLE>
During recent years, there have been significant fluctuations in the prices paid
for crude oil in the world markets. This situation has had a destabilizing
effect on crude oil's posted prices in the United States, including the posted
prices paid by purchasers of EXCO's crude oil. The weighted average prices of
oil and natural gas at December 31, 1996 and 1997, used in the above table, were
$24.29 and $16.74 per Bbl, respectively, and $3.40 and $2.11 per Mcf,
respectively.
F-17
<PAGE> 85
EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Information subsequent to December 31, 1997, and for the
three months ended March 31, 1998, is unaudited)
The following are the principal sources of change in the Standardized Measure of
discounted future net cash flows:
CHANGES IN STANDARDIZED MEASURE (In thousands)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31,
--------------- ----------------------------
1995 1996 1997
--------------- ------------- -------------
<S> <C> <C> <C>
Sales and transfers of oil and natural gas produced, net of production $ (227) $ (443) $ (348)
costs..................................................................
Net changes in prices and production costs............................. 136 3,980 (3,398)
Extensions and discoveries, net of future development and production costs 194 47 --
Development costs during the period.................................... -- -- 45
Revisions of previous quantity estimates............................... (887) 319 (845)
Sales of reserves in place............................................. -- (131) (577)
Purchases of reserves in place......................................... 1,437 142 --
Accretion of discount ................................................. 234 400 952
Net change in income taxes............................................. -- -- (283)
--------------- ------------- -------------
Net change............................................................. $ 887 $ 4,314 $ (4,454)
=============== ============= =============
</TABLE>
F-18
<PAGE> 86
EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, and for
the three months ended March 31, 1998, is unaudited)
13. Pro Forma Combined Condensed Financial Statements (Unaudited)
On February 11, 1998, EXCO Resources, Inc. (the "Company") acquired from
Osborne Oil Company, Gypsy Production Company, and other working interest
owners, certain oil and gas properties in Maverick County, Texas (the "Maverick
County Properties"). The Maverick County Properties include 9 gross (7.0 net)
producing wells, 2 gross (1.87 net) non-producing wells which may require
recompletions, workovers or abandonment. The Maverick County Properties include
360 gross (280 net) developed acres and 3,384 gross (2,843 net) undeveloped
acres. The purchase price consisted of cash of approximately $760,200.
The acquisition was funded through borrowings made under the Company's credit
facility with NationsBank (the "Borrowings"), and cash from working capital.
The accompanying pro forma combined condensed financial statements are based on
the historical financial statements of the Company for the three months ended
March 31, 1998, included elsewhere herein. The pro forma combined
condensed financial statements are also based, in part, on the historical
statements of operating revenues and direct operating expenses of the Maverick
County Properties. Such statements of operating revenues and direct operating
expenses are included elsewhere herein.
The Pro Forma Combined Condensed Statement of Operations for the three months
ended March 31, 1998, has been prepared assuming the acquisition of the
Maverick County Properties and the Borrowings had been consummated on
January 1, 1998.
The pro forma adjustments are based upon available information and assumptions
that management of the Company believes are reasonable. The pro forma combined
condensed financial statements do not purport to represent the financial
position or results of operations of EXCO which would have occurred had such
transactions been consummated on the dates indicated or EXCO's financial
position or results of operations for any future date or period. These pro forma
combined condensed financial statements and notes thereto should be read in
conjunction with the historical financial statements and notes thereto described
above.
<TABLE>
<CAPTION>
----------------------------------------------
Three Months Ended March 31, 1998
----------------------------------------------
Maverick
County
EXCO Properties Pro Forma Pro Forma
Historical Historical Adjustments Combined
---------- ---------- ----------- ---------
(in thousands)
<S> <C> <C> <C> <C>
REVENUES:
Oil and natural gas ................ $ 173 $25 $ -- $ 198
Other .............................. 10 -- -- 10
------ --- --- -----
183 25 -- 208
EXPENSES:
Oil and natural gas production ..... 95 18 -- 113
Depletion, depreciation and
amortization ..................... 36 6 -- 42
General and administrative ......... 239 -- -- 239
Interest and other ................. 7 -- 5(1) 12
------ --- ---- -----
Income (loss) before income taxes .. $(194) $ 1 $ (5) $(198)
====== === ==== =====
Basic and diluted EPS .............. $ (.38) -- -- $(.39)
====== === ==== =====
Weighted average number of common
and common equivalent shares
outstanding ...................... 509 -- -- 509
====== === ==== =====
</TABLE>
(1) To record interest expense on the Borrowings, based on a 7.30% per annum
interest rate.
F-19
<PAGE> 87
EXCO RESOURCES, INC.
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
On February 11, 1998, EXCO acquired from Osborne Oil Company, Gypsy Production
Company, and other working interest owners, certain oil and natural gas
properties in Maverick County, Texas (the "Maverick County Properties"). The
Maverick County Properties include 9 gross (7.0 net) producing wells, 2 gross
(1.87 net) non-producing wells which may require recompletions, workovers or
abandonment. The Maverick County Properties include 360 gross (280 net)
developed acres and 3,384 gross (2,843 net) undeveloped acres. The purchase
price consisted of cash of approximately $760,200.
The acquisition was funded through borrowings made under EXCO's credit facility
with NationsBank (the "Borrowings"), and cash from working capital.
As of May 1, 1998, EXCO entered into a merger agreement with Gladstone
Resources, Inc. ("Gladstone") whereby Gladstone will be merged into EXCO. On the
closing date, Gladstone stockholders are expected to receive approximately $1.4
million in cash for all of the outstanding capital stock of Gladstone. The
merger, which is expected to close on or before July 31, 1998, will be funded
from net proceeds of the rights offering (the "Offering").
On May 8, 1998, EXCO purchased all of the outstanding capital stock of
Jacobi-Johnson Energy, Inc. ("Jacobi-Johnson"). The aggregate purchase price was
approximately $1.4 million, consisting of approximately $703,000 in cash, and
85,436 shares of EXCO common stock. The cash portion of the consideration
was funded through borrowings made under EXCO's credit facility with
NationsBank.
On June 30, 1998, EXCO acquired certain oil and natural gas properties from J.M.
Hill, J.M. Hill, Trustee, Walter O. Hill, Steve J. Devos and various working
interest owners in Dawson and Brazos Counties, Texas (the "Dawson County
Properties"). The Dawson County Properties include 11 gross (5.3 net) producing
wells and 4 gross (1.5 net) saltwater disposal and non-producing wells which
may require recompletions, workovers or abandonment. The Dawson County
Properties include 645 gross (327 net) developed acres and 627 gross (279 net)
undeveloped acres. The purchase price is approximately $3.5 million cash to be
paid for using funds available under EXCO's Credit Facility.
The accompanying pro forma combined condensed financial statements are based on
the historical financial statements of EXCO for the year ended December 31,
1997, and the three months ended March 31, 1998, included elsewhere herein. The
pro forma combined condensed financial statements are also based, in part, on
the historical financial statements of Jacobi-Johnson and Gladstone, and on the
historical statements of operating revenues and direct operating expenses of the
Maverick County Properties and the Dawson County Properties. Such historical
financial statements and statements of operating revenues and direct operating
expenses are included elsewhere herein.
The Pro Forma Combined Condensed Balance Sheet as of March 31, 1998, assumes
the acquisition of Jacobi-Johnson, Gladstone, the Dawson County Properties, the
Offering and the Borrowings had been consummated on that date. The Pro Forma
Combined Condensed Statement of Operations for the year ended December 31, 1997,
and the three months ended March 31, 1998, been prepared assuming the
acquisition of the Maverick County Properties, Jacobi-Johnson, Gladstone, the
Dawson County Properties, the Offering and the Borrowings had been consummated
on January 1, 1997.
The pro forma adjustments are based upon available information and assumptions
that management of EXCO believes are reasonable. The pro forma combined
condensed financial statements do not purport to represent the financial
position or results of operations of EXCO which would have occurred had such
transactions been consummated on the dates indicated or EXCO's financial
position or results of operations for any future date or
F-20
<PAGE> 88
EXCO RESOURCES, INC.
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
period. These pro forma combined condensed financial statements and notes
thereto should be read in conjunction with the historical financial statements
and notes thereto described above.
F-21
<PAGE> 89
EXCO RESOURCES, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
MARCH 31, 1998
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
JACOBI- ADJUSTMENTS
EXCO JOHNSON GLADSTONE FOR THE PRO FORMA
HISTORICAL HISTORICAL HISTORICAL ACQUISITIONS COMBINED
------------ ------------- -------------- -------------- ---------------
Assets:
Current assets:
<S> <C> <C> <C> <C> <C>
Cash.................................. $ 52 $ 5 $ 137 $ 387(2)(3)(5) $ 572
(7)(10)(11)
(13)
Accounts receivable and other assets.. 204 92 112 -- 408
------- --------- ---------- -------- ---------
Total current assets.............. 256 97 249 378 980
Net property and equipment................ 1,498 581 863 4,774(3)(6)(7) 7,716
(11)
------- --------- ---------- -------- ---------
$ 1,754 $ 678 $ 1,112 $ 3,061 $ 8,696
======= ========= ========== ======== =========
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable and accrued liabilities$ 357 $ 189 $ 56 $ -- $ 602
Current maturities of long-term debt.. 15 164 -- (164)(3) 15
------- --------- ---------- -------- ---------
Total current liabilities........ 372 353 56 (164) 617
Deferred income taxes..................... -- 11 -- (11)(3) --
Long-term debt, less current maturities... 612 80 3 6,101(2)(3)(5) 6,796
(10)(11)
(13)
------- --------- ---------- -------- ---------
Total liabilities............. 984 444 59 5,926 7,413
------- --------- ---------- -------- ---------
Stockholders' equity:
Preferred stock....................... -- -- -- -- --
Common stock.......................... 10 1 150 (149)(3)(7) 12
Additional paid-in capital............ 954 165 1,230 (884)(3)(7) 1,465
Retained earnings..................... (194) 68 (327) 259 (3)(6)(7) (194)
------- --------- ---------- -------- ---------
Total stockholders' equity........ 770 234 1,053 (774) 1,283
------- --------- ---------- -------- ---------
$ 1,754 $ 678 $ 1,112 $ 3,061 $ 8,696
======= ========= ========== ======== =========
Shares of Common Stock outstanding 509 -- -- 85 594
======= ========= ========== ======== =========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
F-22
<PAGE> 90
EXCO RESOURCES, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Pro Forma Adjustments
--------------------------
Maverick Jacobi- Dawson
EXCO County Johnson Gladstone County Pro Forma
Historical Historical Historical Historical Historical Acquisitions Combined
---------- ---------- ---------- ---------- ---------- ------------ --------
Revenues:
<S> <C> <C> <C> <C> <C> <C> <C>
Oil and natural gas.......... $ 670 $ 279 $ 606 $ 511 $1,012 $ -- $3,078
Other........................ 28 -- 58 -- -- -- 86
----- ----- ----- ----- ----- ----- ------
698 279 664 511 1,012 -- 3,164
Expenses:
Oil and natural gas
production................. 322 170 401 141 220 -- 1,254
Depletion, depreciation and
amortization............... 84 -- 62 133 -- 288(15) 567
Dry holes.................... -- -- -- 463 -- (463)(9) --
General and administrative... 486 -- 23 22 -- -- 531
Interest and other........... 11 -- 25 (24) -- 495(1)(4) 507
(8)(12)(14)
----- ----- ----- ----- ----- ----- ------
Income (loss) before income
taxes...................... (205) 109 153 (224) 792 (320) 305
Income taxes................. -- -- 38 (27) -- 93(16) 104
----- ----- ----- ----- ----- ----- ------
Net income (loss)............ $(205) $ 109 $ 115 $(197) $ 792 $(413) $ 201
===== ===== ===== ===== ===== ===== ======
Basic and diluted earnings
(loss) per share........ . $(.51) $ -- $ -- $ -- $ -- $ -- $ .41
===== ===== ===== ===== ===== ===== ======
Weighted average number of
common and common
equivalent shares
outstanding................ 403 -- -- -- -- 85(3) 488
===== ===== ===== ===== ===== ===== ======
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
F-23
<PAGE> 91
EXCO RESOURCES, INC.
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
Maverick Pro Forma Adjustments
County Jacobi- Dawson --------------------------
EXCO Historical Johnson Gladstone County Pro Forma
Historical (1.5 Months) Historical Historical Historical Other Combined
---------- ---------- ---------- ---------- ---------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Oil and natural gas................. $ 173 $ 25 $ 129 $ 84 $ 263 $ -- $ 694
Other............................... 10 -- 2 -- -- -- 12
---------- ---------- ---------- ---------- ---------- ----- ---------
183 25 131 84 263 -- 686
Expenses:
Oil and natural gas production...... 95 18 75 37 57 -- 282
Depletion, depreciation and
amortization...................... 36 6 16 30 -- 95 (15) 183
Dry holes........................... -- -- -- 14 -- (14)(9) --
General and administrative.......... 239 -- 13 8 -- -- 260
Interest and other.................. 7 -- 6 25 -- 118 (1)(4) 156
(8)(12)
(14)
---------- ---------- ---------- ---------- ---------- ----- ---------
Income (loss) before income taxes... (194) 1 21 (30) 206 (198) (195)
Income taxes........................ -- -- 5 2 -- (7)(16) --
---------- ---------- ---------- ---------- ---------- ----- ---------
Net income (loss)................... $ (194) $ 1 $ 16 $ (32) $ 206 $(191) $ (195)
========== ========== ========== ========== ========== ===== =========
Basic and diluted loss per share.... $ (.38) $ -- $ -- $ -- $ -- $ -- $ (.33)
========== ========== ========== ========== ========== ===== =========
Weighted average number of common
and common equivalent shares
outstanding........................ 509 -- -- -- -- 85 (3) 594
========== ========== ========== ========== ========== ===== =========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
F-24
<PAGE> 92
EXCO RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
A. Pro Forma Adjustments for the Acquisition of the Maverick County Properties
The accompanying unaudited Pro Forma Combined Condensed Statement of Operations
for the year ended December 31, 1997 and the three months ended March 31, 1998
have been prepared as if the acquisition of the Maverick County Properties and
the related borrowings had been consummated on January 1, 1997 and reflects the
following adjustments:
(1) To record interest expense on the borrowings of $600,000, based on a 7.3%
per annum interest rate. An increase of 1/8 of 1% in the interest rate would
increase annual interest expense on the borrowings by $750.
B. Pro Forma Adjustments for the Acquisition of Jacobi-Johnson
The accompanying unaudited Pro Forma Combined Balance Sheet has been prepared
as if the acquisition of Jacobi-Johnson and the related borrowings had been
consummated on March 31, 1998, and reflects the following adjustments:
(2) To record EXCO's borrowing of $900,000 under the NationsBank credit
facility.
(3) To record the acquisition of Jacobi-Johnson in exchange for consideration of
approximately $703,000 in cash, and 85,436 shares of new EXCO common stock. This
adjustment includes the elimination of Jacobi-Johnson's historical stockholders'
equity accounts, the repayment of approximately $224,000 of debt, and
adjustments to oil and gas properties for the excess of the purchase price over
the historical net book value of the net assets acquired.
The accompanying unaudited Pro Forma Combined Condensed Statement of Operations
for the year ended December 31, 1997 and the three months ended March 31, 1998
have been prepared as if the acquisition of Jacobi-Johnson and the Borrowings
had been consummated on January 1, 1997 and reflects the following adjustments:
(4) To adjust interest expense for the borrowings of $900,000, based on a 7.3%
per annum interest rate.
C. Pro Forma Adjustments for the Acquisition of Gladstone
The accompanying unaudited Pro Forma Combined Balance Sheet has been prepared
as if the acquisition of Gladstone and the related borrowings had been
consummated on March 31, 1998, and reflects the following adjustments:
(5) To record EXCO's borrowing of $1,401,000 under the NationsBank credit
facility for the purchase of Gladstone.
(6) To adjust oil and gas properties and retained earnings to reflect the
effect of the change from successful efforts to the full cost method of
accounting for oil and gas properties.
F-25
<PAGE> 93
EXCO RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
(7) To record the acquisition of Gladstone in exchange for consideration of
approximately $1,401,000 in cash. This adjustment includes the
elimination of Gladstone's historical stockholders' equity accounts and
adjustments to oil and gas properties for the excess of the purchase price over
the historical net book value of the net assets acquired.
The accompanying unaudited Pro Forma Combined Condensed Statement of Operations
for the year ended December 31, 1997 and the three months ended March 31, 1998
have been prepared as if the acquisition of Gladstone and the related
borrowings had been consummated on January 1, 1997 and reflects the following
adjustments:
(8) To adjust interest expense for the borrowings of $1,401,000, based on a
7.3% per annum interest rate.
(9) To adjust dry holes expense to reflect the effect of the change from
successful efforts to the full cost method of accounting for oil and gas
properties.
D. Pro Forma Adjustments for the Acquisition of the Dawson County Properties
The accompanying unaudited Pro Forma Combined Balance Sheet has been prepared
as if the acquisition of the Dawson County Properties and related borrowings
had been consummated on March 31, 1998, and reflects the following adjustments:
(10) To record EXCO's borrowing of $3.5 million under the NationsBank credit
facility.
(11) To record the acquisition of the Dawson County Properties in exchange for
consideration of approximately $3.5 million in cash.
The accompanying unaudited Pro Forma Combined Condensed Statement of Operations
for the year ended December 31, 1997 and the three months ended March 31, 1998
have been prepared as if the acquisition of the Dawson County Properties and
the related borrowings had been consummated on January 1, 1997 and reflects the
following adjustments:
(12) To record interest expense on the borrowings of $3.5 million based on a
7.3% per annum interest rate.
E. Pro Forma Adjustments for other transactions under the Credit Facility.
The accompanying unaudited Pro Forma Combined Balance Sheet has been prepared
as if the Offering had been consummated on March 31, 1998, and reflects the
following adjustments:
(13) To record EXCO's borrowings of $425,000 under the NationsBank credit
facility.
F-26
<PAGE> 94
EXCO RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
(14) To record interest expense on the borrowings of $425,000, based on a
7.3% per annum interest rate.
(15) To adjust depreciation, depletion and amortization of the oil and gas
properties to reflect the effect of the acquisitions of the Maverick County
Properties, Jacobi-Johnson, Gladstone, and the Dawson County Properties, using
the full cost method of accounting on total pro forma proved oil and natural
gas reserves.
(16) To adjust the provision for income taxes for the change in financial
taxable income resulting from inclusion of the historical results of operations
of the Maverick County Properties, Jacobi-Johnson, Gladstone, and the Dawson
County Properties and adjustments (1), (4), (8), (11) and (14).
F-27
<PAGE> 95
EXCO RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
F. Pro Forma Combined Supplemental Oil and Natural Gas Reserve and
Standardized Measure Information
Reserve Quantity Information
The following table presents EXCO's estimate of the pro forma combined proved
oil and natural gas reserves of EXCO after giving effect to the acquisition of
the Maverick County Properties, Jacobi-Johnson, Gladstone and the Dawson County
Properties as of December 31, 1997. All reserves are located in the United
States. EXCO emphasizes that reserve estimates are inherently imprecise and that
estimates of new discoveries are more imprecise than those of producing oil and
natural gas properties. Accordingly, the estimates are expected to change as
future information becomes available. The estimates have been prepared by
independent petroleum reservoir engineers except with regard to Gladstone which
were prepared internally by Gladstone.
<TABLE>
<CAPTION>
Oil (Bbls) Gas (Mcf) Boe*
-------------------------------------------------------
<S> <C> <C> <C>
Proved reserves............................................... 870,400 8,386,400 2,268,100
Proved developed reserves..................................... 860,900 5,599,900 1,794,200
================== ================== ==================
</TABLE>
* Boe - Barrels of oil equivalent calculated by converting 6 Mcf of natural gas
to 1 Bbl of oil.
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Natural Gas Reserves
The Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil and Natural Gas Reserves ("Standardized Measure") is a disclosure
requirement under Statement of Financial Accounting Standards No. 69.
The Standardized Measure does not purport to be, nor should it be interpreted to
present, the fair value of EXCO's oil and natural gas reserves. An estimate of
fair value would also take into account, among other things, the recovery of
reserves not presently classified as proved, the value of unproved properties,
and consideration of expected future economic and operating conditions.
Under the Standardized Measure, future cash flows are estimated by applying
year-end prices, adjusted for fixed and determinable escalations, to the
estimated future production of year-end proved reserves. Future cash inflows are
reduced by estimated future production costs, based on period-end costs, and
projected future development costs to determine pre-tax cash inflows. Future
income taxes are computed by applying the statutory rate (based on the current
tax law adjusted for permanent differences and tax credits) to the excess of
pre-tax net cash flows over EXCO's income tax basis of its oil and natural gas
properties. Future net cash flows are discounted using a 10% annual discount
rate to arrive at the Standardized Measure.
The pro forma Standardized Measure of discounted future net cash flows relating
to EXCO's proved oil and natural gas reserves at December 31, 1997, follows (in
thousands):
<TABLE>
<S> <C>
Future cash inflows.............................................................................. $ 31,630
Future production costs.......................................................................... 9,897
Future development costs......................................................................... 1,150
Future income taxes ............................................................................. 1,305
---------------
Future net cash flows ........................................................................... 19,278
Discount of future net cash flows at 10% per annum............................................... 7,048
---------------
Pro forma Standardized Measure of discounted future net cash flows.............................. $ 12,231
===============
</TABLE>
F-28
<PAGE> 96
EXCO RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
The future cash flows shown above include amounts attributable to nonproducing
reserves requiring approximately $1,150,000 of future development costs. If
these reserves are not developed, the Standardized Measure of discounted future
net cash flows as of December 31, 1997, shown above would be reduced
significantly.
Estimates of economically recoverable oil and natural gas reserves and of future
net revenues are based upon a number of variable factors and assumptions, all of
which are to some degree speculative and may vary considerably from actual
results. Therefore, actual production, revenues, taxes, development and
operating expenditures may not occur as estimated. The reserve data are
estimates only, are subject to many uncertainties and are based on data gained
from production histories and on assumptions as to geologic formations and other
matters. Actual quantities of oil and natural gas may differ materially from the
amounts estimated.
The weighted average prices of oil and natural gas at December 31, 1997, used in
the calculation of the pro forma Standardized Measure were $16.68 per barrel and
$2.04 per Mcf, respectively.
F-29
<PAGE> 97
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
EXCO Resources, Inc.
We have audited the accompanying statements of operating revenues and direct
operating expenses of the Maverick County Properties (as defined in Note 1 to
the accompanying statements) for the years ended December 31, 1996 and 1997.
These statements are the responsibility of EXCO's management. Our responsibility
is to express an opinion on these statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the statements of operating revenues and
direct operating expenses are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the statements of operating revenues and direct operating expenses. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
The accompanying statements of operating revenues and direct operating expenses
were prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission and are not intended to be a complete
presentation of revenues and expenses of the Maverick County Properties.
In our opinion, the statements of operating revenues and direct operating
expenses referred to above present fairly, in all material respects, the
operating revenues and direct operating expenses of Maverick County Properties
for the years ended December 31, 1996 and 1997 in conformity with generally
accepted accounting principles.
/S/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Dallas, Texas
February 11, 1998
F-30
<PAGE> 98
MAVERICK COUNTY PROPERTIES
STATEMENTS OF OPERATING REVENUES
AND DIRECT OPERATING EXPENSES
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997
--------------- ---------------
<S> <C> <C>
Oil and natural gas sales............................................ $ 397 $ 279
Direct operating expenses............................................ 206 170
--------------- ---------------
Excess of revenues over direct operating expenses.................... $ 191 $ 109
=============== ===============
</TABLE>
See accompanying notes to statements of operating revenues and direct operating
expenses.
F-31
<PAGE> 99
MAVERICK COUNTY PROPERTIES
NOTES TO STATEMENTS OF OPERATING REVENUES
AND DIRECT OPERATING EXPENSES
1. Basis of Presentation
On February 11, 1998, EXCO acquired from Osborne Oil Company, Gypsy Production
Company, and other working interest owners, certain oil and natural gas
properties in Maverick County, Texas (the "Maverick County Properties"). The
Maverick County Properties include 9 gross (7.0 net) producing wells and 2 gross
(1.87 net) non-producing wells which may require recompletions, workovers or
abandonment. The Maverick County Properties include 360 gross (280 net)
developed acres and 3,384 gross (2,843 net) undeveloped acres. The purchase
price consisted of cash of approximately $760,200.
The acquisition was funded through borrowings made under EXCO's credit facility
with NationsBank, and cash from working capital.
The accompanying financial statements present the operating revenues and direct
operating expenses of the Maverick County Properties. The operating revenues and
direct operating expenses presented herein relate only to the interests in the
producing oil and natural gas properties acquired and do not represent all of
the oil and natural gas operations of the sellers. Direct operating expenses
include the actual costs of maintaining the producing properties and their
production, but do not include charges for depletion, depreciation, and
amortization; federal and state income taxes; interest; or general and
administrative expenses. Presentation of complete historical financial
statements for the years ended December 31, 1996 and 1997 is not practicable
because the Maverick County Properties were not accounted for as a separate
entity; and therefore, such statements are not available. The operating revenues
and direct operating expenses for the periods presented may not be
representative of future operations.
Revenues in the accompanying statements of operating revenues and direct
operating expenses are recognized on the sales method. Direct operating expenses
are recognized on an accrual basis.
2. Supplemental Oil and Natural Gas Reserve and Standardized Measure
Information
Reserve Quantity Information
The following table presents EXCO's estimate of the proved oil and natural gas
reserves of the Maverick County Properties, all of which are located in the
United States, as of December 31, 1997. EXCO emphasizes that reserve estimates
are inherently imprecise and that estimates of new discoveries are more
imprecise than those of producing oil and natural gas properties. Accordingly,
the estimates are expected to change as future information becomes available.
The estimates have been prepared by independent petroleum reservoir engineers.
<TABLE>
<CAPTION>
Oil (Bbls) Gas (Mcf) Boe*
---------------- --------------- ---------------
<S> <C> <C> <C>
Proved reserves................................... 8,011 2,447,785 415,975
================= ================ ===============
Proved developed reserves......................... 0 1,646,710 274,452
================= ================ ===============
</TABLE>
* Boe - Barrels of oil equivalent calculated by converting 6 Mcf
of natural gas to 1 Bbl of oil.
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves
The Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil and Gas Reserves ("Standardized Measure") is a disclosure requirement under
Statement of Financial Accounting Standards No. 69.
The Standardized Measure does not purport to be, nor should it be interpreted to
present, the fair value of the oil and natural gas reserves of the Maverick
County Properties. An estimate of fair value would also take into account,
F-32
<PAGE> 100
MAVERICK COUNTY PROPERTIES
NOTES TO STATEMENTS OF OPERATING REVENUES
AND DIRECT OPERATING EXPENSES
among other things, the recovery of reserves not presently classified as proved,
the value of unproved properties, and consideration of expected future economic
and operating conditions.
Under the Standardized Measure, future cash flows are estimated by applying
year-end prices, adjusted for fixed and determinable escalations, to the
estimated future production of year-end proved reserves. Future cash flows are
reduced by estimated future production costs, based on period-end costs, and
projected future development costs to determine net cash inflows. The Maverick
County Properties are not a separate tax paying entity. Accordingly, the
Standardized Measure for the Maverick County Properties is presented before
deduction of income taxes. Future net cash flows are discounted using a 10%
annual discount rate to arrive at the Standardized Measure.
The Standardized Measure of discounted future net cash flows relating to proved
oil and natural gas reserves of the Maverick County Properties at December 31,
1997 follows (in thousands):
<TABLE>
<S> <C>
Future cash inflows................................................................................ $ 4,697
Future production costs............................................................................ 1,773
Future development costs........................................................................... 459
Discount of future net cash flows at 10% per annum................................................. 918
-------------
Discounted future net cash flows before income taxes............................................... $ 1,547
=============
</TABLE>
Estimates of economically recoverable oil and natural gas reserves and of future
net revenues are based upon a number of variable factors and assumptions, all of
which are to some degree speculative and may vary considerably from actual
results. Therefore, actual production, revenues, taxes, development and
operating expenditures may not occur as estimated. The reserve data are
estimates only, are subject to many uncertainties and are based on data gained
from production histories and on assumptions as to geologic formations and other
matters. Actual quantities of natural gas and oil may differ materially from the
amounts estimated.
The weighted average prices of oil and natural gas at December 31, 1997 used in
the calculation of the Standardized Measure were $17.00 per barrel and $1.86 per
Mcf, respectively.
F-33
<PAGE> 101
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Jacobi-Johnson Energy, Inc.
We have audited the accompanying balance sheets of Jacobi-Johnson Energy, Inc.,
as of December 31, 1996 and 1997, and the related statements of operations, cash
flows, and changes in stockholders' equity for the years then ended. These
financial statements are the responsibility of Jacobi-Johnson's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Jacobi-Johnson Energy, Inc., at
December 31, 1996 and 1997, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Dallas, Texas
May 15, 1998
F-34
<PAGE> 102
JACOBI-JOHNSON ENERGY, INC.
BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31
--------------------------- --------------
1996 1997 1998
------------- ------------ --------------
(unaudited)
Assets:
Current assets:
<S> <C> <C> <C>
Cash................................................................ $ 63 $ 24 $ 5
Accounts receivables:
Oil and natural gas sales....................................... 96 50 55
Joint interest.................................................. 16 35 29
Other........................................................... 3 8 8
------------- ------------ --------------
Total current assets....................................... 178 117 97
Oil and natural gas properties (full cost accounting method):
Proved developed oil and natural gas properties..................... 554 668 707
Allowance for depreciation, depletion, and amortization............. (96) (149) (163)
------------- ------------ --------------
Oil and natural gas properties, net................................. 458 519 544
Office and field equipment, net.......................................... 5 39 37
------------- ------------ --------------
Total assets............................................... $ 641 $ 675 $ 678
============= ============ ==============
Liabilities and Stockholders' Equity Current liabilities:
Accounts payable.................................................... $ 93 $ 69 $ 52
Joint interest prepayments.......................................... 9 29 23
Revenues and royalties payable...................................... 99 72 32
Note payable to related party....................................... -- 50 50
Income taxes payable................................................ -- 32 32
Current maturities of long-term debt ............................... 149 147 164
------------- ------------ --------------
Total current liabilities.................................. 350 399 353
Deferred income taxes.................................................... -- 6 11
Long-term debt, less current maturities ................................. 163 52 80
Stockholders' equity:
Common stock, $.10 par value:
Authorized shares - 20,000
Issued and outstanding shares - 10,711, 10,341 and 10,341
at December 31, 1996 and 1997, and March 31, 1998, respectively. 1 1 1
Additional paid-in capital.......................................... 175 165 165
Retained earnings (deficit)......................................... (48) 52 68
------------- ------------ --------------
Total stockholders' equity............................................... 128 218 234
------------- ------------ --------------
Total liabilities and stockholders' equity............................... $ 641 $ 675 $ 678
============= ============ ==============
</TABLE>
See accompanying notes.
F-35
<PAGE> 103
JACOBI-JOHNSON ENERGY, INC.
STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
-------------------- ---------------------
1996 1997 1997 1998
------- --------- -------- ---------
(unaudited)
Revenues:
<S> <C> <C> <C> <C>
Oil and natural gas.......................................... $ 471 $ 606 $ 169 $ 129
Other income................................................. 93 55 23 2
Gain on disposition of property and equipment................ -- 3 -- --
------- --------- -------- ---------
Total revenues..................................... 564 664 192 131
Cost and expenses:
Oil and natural gas production............................... 345 401 103 75
Depreciation, depletion and amortization..................... 76 62 17 16
General and administrative................................... 46 23 17 13
Interest..................................................... 32 25 7 6
------- --------- ------- ---------
Total cost and expenses............................. 499 511 144 110
------- --------- ------- ---------
Income before income taxes........................................ 65 153 48 21
Income tax expense ............................................... -- 38 10 5
------- --------- ------- ---------
Net income ....................................................... $ 65 $ 115 $ 38 $ 16
======= ========= ======= =========
Basic and diluted earnings per share.............................. $ 6.46 $ 10.75 $ 3.57 $ 1.53
======= ========= ======= =========
Weighted average number of common and
common equivalent shares outstanding............................ 10,002 10,651 10,711 10,341
======= ========= ======= =========
</TABLE>
See accompanying notes.
F-36
<PAGE> 104
JACOBI-JOHNSON ENERGY, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31
-------------------- -----------------
1996 1997 1997 1998
------- ------- ----- ------
(unaudited)
Operating Activities:
<S> <C> <C> <C> <C>
Net income .......................................................... $ 65 $ 115 $ 38 $ 16
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation, depletion and amortization........................ 76 62 17 16
Deferred income taxes........................................... -- 6 10 5
Gain on disposition and abandonment of
property and equipment...................................... -- (3) -- --
Other........................................................... 5 -- -- --
Effect of changes in:
Accounts receivable......................................... (78) 22 (5) 1
Current income taxes payable................................ -- 32 -- --
Accounts payable and other current liabilities:............. 75 (31) (52) (63)
------- ------- ----- ------
Net cash provided by (used in) operating activities.................. 143 203 8 (25)
Investing Activities:
Additions to property and equipment.................................. (430) (212) (17) (39)
Proceeds from disposition of property and equipment.................. 8 58 -- --
------- ------- ----- ------
Net cash used in investing activities................................ (422) (154) (17) (39)
Financing Activities:
Proceeds from note payable and long-term debt........................ 380 89 -- 70
Payments on long-term debt........................................... (121) (152) (37) (25)
Stock repurchase..................................................... -- (25) -- --
------- ------- ----- ------
Net cash provided by (used in) financing activities.................. 259 (88) (37) 45
------- ------- ----- ------
Net increase (decrease) in cash...................................... (20) (39) (46) (19)
Cash at beginning of period............................................ 83 63 63 24
------- ------- ----- ------
Cash at end of period.................................................. $ 63 $ 24 $ 17 $ 5
======= ======= ===== ======
Supplemental Cash Flow Information:
Interest paid........................................................ $ 27 $ 23 $ 5 $ 6
======= ======= ===== ======
</TABLE>
See accompanying notes.
F-37
<PAGE> 105
JACOBI-JOHNSON ENERGY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands except share amounts)
<TABLE>
<CAPTION>
Common Stock
-----------------------------
Additional Retained Total
Number of Paid-In Earnings Stockholders'
Shares Amount Capital (Deficit) Equity
------------- -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance on January 1, 1996................ 10,000 $ 1 $ 90 $ (113) $ (22)
Shares issued from note conversion 711 0 85 -- 85
Net income........................... -- -- -- 65 65
------------- -------------- ------------- -------------- --------------
Balance on December 31, 1996.............. 10,711 1 175 (48) 128
Shares repurchased by Jacobi-Johnson. (370) (0) (10) (15) (25)
Net income........................... -- -- -- 115 115
------------- -------------- ------------- -------------- --------------
Balance on December 31, 1997.............. 10,341 1 165 52 218
Net income (unaudited)............... -- -- -- 16 16
------------- -------------- ------------- -------------- --------------
Balance on March 31, 1998 (unaudited)..... 10,341 $ 1 $ 165 $ 68 $ 234
============= ============== ============= ============== ==============
</TABLE>
See accompanying notes.
F-38
<PAGE> 106
JACOBI-JOHNSON ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1. Summary of Significant Accounting Policies
Organization
Jacobi-Johnson, a Texas corporation, was formed in 1991. Jacobi-Johnson's
operations consist primarily of acquiring interests in producing oil and natural
gas properties located in the continental United States. Jacobi-Johnson also
acts as the operator on certain of these properties and receives overhead
reimbursement fees as a result.
Management Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, Jacobi-Johnson is required to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses during the reporting period. Actual results may differ from
management's estimates.
Cash Equivalents
Jacobi-Johnson considers all highly liquid investments with maturities of 3
months or less when purchased to be cash equivalents.
Concentration of Credit Risk and Accounts Receivable
Financial instruments that potentially subject Jacobi-Johnson to concentration
of credit risk consist principally of cash and trade receivables. Jacobi-Johnson
places its cash with high credit quality financial institutions. Jacobi-Johnson
sells oil and natural gas to various customers. In addition, Jacobi-Johnson
participates with other parties in the drilling, completion, and operation of
oil and natural gas wells. Substantially all of Jacobi-Johnson's accounts
receivable are due from either purchasers of oil, natural gas, or natural gas
liquids or participants in oil and natural gas wells for which Jacobi-Johnson
serves as the operator. Generally, operators of oil and natural gas properties
have the right to offset future revenues against unpaid charges related to
operated wells. Oil and natural gas sales are generally unsecured. Credit losses
are provided for in the financial statements and have been within management's
expectations. The allowance for doubtful accounts receivable aggregated $0 at
December 31, 1996 and 1997.
Oil and Natural Gas Properties
Oil and natural gas properties are recorded at cost using the full cost method
of accounting, as prescribed by the the SEC. Under the full cost method, all
costs associated with the acquisition, exploration or development of oil and
natural gas properties are capitalized as part of the full cost pool.
Depreciation, depletion, and amortization of evaluated oil and natural gas
properties are provided using the unit-of-production method based on total
proved reserves, as determined by independent petroleum reservoir engineers.
Sales, dispositions, and other oil and natural gas property retirements are
accounted for as adjustments to the full cost pool, with no recognition of gain
or loss unless such disposition would significantly alter the amortization rate.
Office and Field Equipment
Office and field equipment are capitalized at cost and depreciated on a
straight line basis over their estimated useful lives.
Revenue Recognition
Jacobi-Johnson uses the sales method of accounting for oil and gas revenues.
Under the sales method, revenues are recognized on actual volumes of oil and
gas sold to purchasers.
Overhead Reimbursement Fees
F-39
<PAGE> 107
JACOBI-JOHNSON ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
Fees from overhead charges billed to working interest owners, including
Jacobi-Johnson, of $139,450 and $154,350 for the years ended December 31, 1996
and 1997, respectively, have been classified as a reduction of general and
administrative expenses in the accompanying statements of operations.
Income Taxes
Deferred income taxes are accounted for using the liability method in accounting
for income taxes.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated, to conform to the Statement No. 128
requirements. The effect of the adoption of Statement No. 128 did not have a
material impact.
INTERIM FINANCIAL STATEMENT PRESENTATION
In management's opinion, the accompanying interim financial statements contain
all adjustments (consisting solely of normal recurring accruals) necessary to
present fairly the financial position of Jacobi-Johnson as of March 31, 1998,
the results of operations for the three month periods ended March 31, 1997 and
1998, and the cash flows for the three month periods ended March 31, 1997 and
1998.
The results of operations for the three months ended March 31, 1998, are not
necessarily indicative of the results expected for the full year.
2. Long-Term Debt
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------------
1996 1997
-------------- ---------------
<S> <C> <C>
Notes payable........................................................ $ 312 $ 199
Less current maturities.............................................. 149 147
-------------- ---------------
Long-term debt....................................................... $ 163 $ 52
============== ===============
</TABLE>
At December 31, 1997, the future minimum principal payments on Jacobi-Johnson's
long-term debt subsequent to December 31, 1998 were: $34,373 in 1999; $7,249 in
2000; $5,196 in 2001; and $5,150 in 2002, based on borrowings outstanding at
December 31, 1997.
Southside Bank Credit Agreement
On January 12, 1998, Jacobi-Johnson refinanced its existing credit agreement
with Southside Bank (the "Credit Agreement"). The Credit Agreement consists of
an installment loan with an original balance of $232,486. The maturity date of
the Credit Agreement is July 28, 1999.
The Credit Agreement provides for 18 total monthly payments of $13,864 each.
The interest is calculated at a fixed rate of 8.5% per annum.
Borrowings under the Credit Agreement are secured by a deed of trust on real
property owned by Jacobi-Johnson located in Polk County, Texas.
F-40
<PAGE> 108
JACOBI-JOHNSON ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
3. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
Jacobi-Johnson's deferred tax liabilities and assets are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1997
-------------- -------------
Deferred tax liabilities:
<S> <C> <C>
Book basis of oil and natural gas properties in excess of tax basis..................... 8 15
Accrued revenue in excess of accrued expenses........................................... 23 1
-------------- -------------
Total deferred tax liabilities...................................................... 31 16
Deferred tax assets:
Net operating loss carryforwards........................................................ 25 --
Statutory depletion carryforwards....................................................... 6 6
Other................................................................................... 4 4
Valuation allowance for deferred tax assets............................................. (4) --
-------------- -------------
Total deferred tax assets......................................................... 31 10
Net deferred tax liabilities............................................................ -- 6
============== =============
</TABLE>
Jacobi-Johnson files its federal income tax return on a cash basis.
The following is a reconciliation, stated as a percentage of pretax income
(loss) taxable at the corporate level, of the U.S. statutory federal income tax
rate to Jacobi-Johnson's effective tax rate:
<TABLE>
<CAPTION>
1996 1997
---------------- --------------
<S> <C> <C>
U.S. federal statutory rate......................... 34% 34%
Effect of graduated rates........................... -- (7)%
Adjustments to the valuation allowance.............. 34% (2)%
---------------- ---------------
Effective tax rate.................................. -- 25%
================ ===============
</TABLE>
F-41
<PAGE> 109
JACOBI-JOHNSON ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
4. Related Party Transactions
The parents of one of the principal stockholders loaned $50,000 to
Jacobi-Johnson in 1997 upon the same terms and conditions as could be obtained
with unrelated parties. In addition, one of the stockholders loaned $68,248 to
Jacobi-Johnson in 1993. This note was converted to 711 shares of new
Jacobi-Johnson common stock in December 1996.
5. Commitments and Contingencies
Rent expense was approximately $10,693 for each of the years ended December 31,
1996 and 1997. As of December 31, 1997, Jacobi-Johnson's operating lease expires
in February, 1998. The rent under the lease is $891 per month.
6. Environmental Regulation
Various Federal, state and local laws and regulations covering discharge of
materials into the environment, or otherwise relating to the protection of the
environment, may affect Jacobi-Johnson's operations and costs of oil and natural
gas exploitation, development and production operations. It is not anticipated
that Jacobi-Johnson will be required in the near future to expend amounts
material in relation to the financial statements taken as a whole by reason of
environmental laws and regulations. Because such laws and regulations are
constantly being changed, Jacobi-Johnson is unable to predict the conditions and
other factors, over which Jacobi-Johnson does not exercise control, that may
give rise to environment liabilities.
7. Subsequent Event
On May 8, 1998, EXCO acquired all of the outstanding common stock of
Jacobi-Johnson. The aggregate purchase price paid for the stock was $1,476,451,
subject to post-closing adjustments. The post-closing adjustments may include
adjustments if it is determined that the net working capital of Jacobi-Johnson
at Closing is different than at January 1, 1998, if determined within 90 days of
the Closing and for any title problems if the problems are discovered within 60
days of the Closing. The Sellers have agreed to indemnify EXCO for amounts
arising from any breach by Sellers, including environmental damages, to the
extent such amount exceeds $20,000. EXCO has agreed to indemnify the Sellers for
amounts arising from any breach by EXCO, to the extent such amount exceeds
$20,000. The acquisition was effective January 1, 1998. The amount of
consideration was determined through arm's length negotiations taking into
account estimates of recoverable reserves, current oil and natural gas prices,
the fair market value of other property and equipment, the amount of cash and
cash equivalents on hand, the collectibility and estimated payment timing of
accounts receivable and the amount of current and long-term liabilities. The
consideration consisted of $703,035 cash, 85,436 shares of EXCO Common Stock and
EXCO assumed approximately $260,800 of Jacobi-Johnson indebtedness.
Simultaneously with the Closing, EXCO paid in full all outstanding loans with
Southside Bank. EXCO obtained the cash for the purchase price and payoff of the
Southside Bank loans under its credit facility (the "Credit Facility") with
NationsBank of Texas, N.A. The Jacobi-Johnson Properties have been mortgaged
under the Credit Facility.
F-42
<PAGE> 110
JACOBI-JOHNSON ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
8. Oil and Natural Gas Producing Activities
The results of operations from Jacobi-Johnson's oil and natural gas producing
activities are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------------
1996 1997
------------- --------------
<S> <C> <C>
Oil and natural gas sales........................................ $ 471 $ 606
Production costs................................................. (345) (401)
Depreciation, depletion and amortization......................... (71) (53)
Income tax expense............................................... -- (38)
------------- --------------
$ 55 $ 114
------------- --------------
</TABLE>
Costs incurred in oil and natural gas producing activities are as follows (in
thousands, except per equivalent barrel amounts):
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------------
1996 1997
------------- --------------
<S> <C> <C>
Property acquisition costs....................................... $ 318 $ 87
Development costs................................................ 112 82
Exploration costs................................................ 0 0
Production costs................................................. 345 401
Depreciation, depletion and amortization per equivalent barrel... 3.04 1.65
</TABLE>
All of Jacobi-Johnson's oil and natural gas revenues are from proved developed
properties located in the United States.
Jacobi-Johnson's oil and natural gas production is sold to various purchasers.
During the year ended December 31, 1996, sales of oil and natural gas to 1
purchaser accounted for 67% of consolidated gross revenues. During the year
ended December 31, 1997, sales of oil and natural gas to 2 purchasers accounted
for 58% and 18% of consolidated gross revenues, respectively. Management
believes that the loss of these purchasers would not have a material impact on
Jacobi-Johnson's consolidated financial condition or results of operations.
In an effort to reduce the effects of the volatility of the price of crude oil
and natural gas on Jacobi-Johnson's operations, management has adopted a policy
of hedging oil and natural gas prices whenever such prices are in excess of the
prices anticipated in Jacobi-Johnson's operating budget and profit plan through
the use of commodity futures, options, and swap agreements. Hedging transactions
require the approval of the Board of Directors. There were no outstanding
contracts at December 31, 1997.
9. Supplemental Oil and Natural Gas Reserve and Standardized Measure
Information (Unaudited)
Jacobi-Johnson currently retains independent engineering firms to provide annual
year-end estimates of Jacobi-Johnson's future net recoverable oil, natural gas,
and natural gas liquids reserves. Estimated proved net recoverable reserves as
shown below include only those quantities that can be expected to be
commercially recoverable at prices and costs in effect at the balance sheet
dates under existing regulatory practices and with conventional equipment and
operating methods. Proved developed reserves represent only those reserves to
F-43
<PAGE> 111
JACOBI-JOHNSON ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
be recovered through existing wells. Proved undeveloped reserves include those
reserves expected to be recovered from new wells on undrilled acreage or from
existing wells on which a relatively major expenditure is required for
recompletion.
Estimated Quantities of Proved Reserves
<TABLE>
<CAPTION>
Oil (Bbl) Gas (Mcf) Boe*
-------------- ------------- --------------
(In thousands)
<S> <C> <C> <C>
January 1, 1996............................................................ 38 36 44
Purchase of reserves in place..................................... 93 228 131
Revisions of previous estimates................................... (6) 3 (6)
Production........................................................ (18) (32) (23)
-------------- ------------- --------------
December 31, 1996.......................................................... 107 235 146
Purchase of reserves in place..................................... 49 36 55
Revisions of previous estimates................................... 99 398 166
Production........................................................ (20) (71) (32)
-------------- ------------- --------------
December 31, 1997.......................................................... 235 598 335
============== ============= ==============
Estimated Quantities of Proved Developed Reserves
Oil (Bbl) Gas (Mcf) Boe*
-------------- ------------- --------------
(In thousands)
December 31, 1995.......................................................... 38 36 44
December 31, 1996.......................................................... 107 235 146
December 31, 1997.......................................................... 235 598 335
</TABLE>
* Boe - Barrels of oil equivalent calculated by converting 6 Mcf of natural gas
to 1 Bbl of oil.
The following is a summary of a Standardized Measure of discounted net cash
flows related to Jacobi-Johnson's proved oil, natural gas, and natural gas
liquids reserves. The information presented is based on a valuation of proved
reserves using discounted cash flows based on year-end prices, costs, and
economic conditions and a 10% discount rate. The additions to proved reserves
from new discoveries and extensions could vary significantly from year to year;
additionally, the impact of changes to reflect current prices and costs of
reserves proved in prior years could also be significant. Accordingly, the
information presented below should not be viewed as an estimate of the fair
value of Jacobi-Johnson's oil and natural gas properties, nor should it be
considered indicative of any trends.
F-44
<PAGE> 112
JACOBI-JOHNSON ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
Standardized Measure of Discounted Future Net Cash Flows
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
------------- -------------
(In thousands)
<S> <C> <C>
Future cash inflows..................................................................... $ 3,478 $ 5,018
Future production costs................................................................. 1,109 2,155
Future development costs................................................................ -- 22
Future income taxes..................................................................... 427 425
------------- -------------
Future net cash flows .................................................................. 1,942 2,416
Discount of future net cash flows at 10% per annum...................................... 512 965
------------- -------------
Standardized Measure of discounted future net cash flows................................ $ 1,430 $ 1,451
============= =============
</TABLE>
During recent years, there have been significant fluctuations in the prices paid
for crude oil in the world markets. This situation has had a destabilizing
effect on crude oil's posted prices in the United States, including the posted
prices paid by purchasers of Jacobi-Johnson's crude oil. The weighted average
prices of oil and natural gas at December 31, 1996 and 1997, used in the above
table, were $24.80 and $15.97 per Bbl, respectively, and $3.48 and $2.12 per
Mcf, respectively.
The following are the principal sources of change in the Standardized Measure of
discounted future net cash flows:
Changes in Standardized Measure
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1996 1997
------------- -------------
(In thousands)
<S> <C> <C>
Sales and transfers of oil and natural gas produced, net of production costs............ $ (126) $ (205)
Net changes in prices and production costs.............................................. 650 (471)
Extensions and discoveries, net of future development and production costs.............. -- --
Development costs during the period..................................................... -- --
Revisions of previous quantity estimates................................................ (43) 197
Sales of reserves in place.............................................................. -- --
Purchases of reserves in place.......................................................... 770 270
Accretion of discount................................................................... 174 228
Net change in income taxes.............................................................. -- 2
------------- -------------
Net change.............................................................................. $ 1,425 $ 21
============= =============
</TABLE>
F-45
<PAGE> 113
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
EXCO Resources, Inc.
We have audited the accompanying statements of operating revenues and direct
operating expenses of the Dawson County Properties (as defined in Note 1 to the
accompanying statements) for the years ended December 31, 1996 and 1997. These
statements are the responsibility of EXCO's management. Our responsibility is to
express an opinion on these statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the statements of operating revenues and
direct operating expenses are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the statements of operating revenues and direct operating expenses. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
The accompanying statements of operating revenues and direct operating expenses
were prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission and are not intended to be a complete
presentation of revenues and expenses of the Dawson County Properties.
In our opinion, the statements of operating revenues and direct operating
expenses referred to above present fairly, in all material respects, the
operating revenues and direct operating expenses of Dawson County Properties for
the years ended December 31, 1996 and 1997 in conformity with generally accepted
accounting principles.
/S/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Dallas, Texas
June 30, 1998
F-46
<PAGE> 114
DAWSON COUNTY PROPERTIES
STATEMENTS OF OPERATING REVENUES
AND DIRECT OPERATING EXPENSES
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- ----------------------------
1996 1997 1997 1998
--------------- --------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Oil and natural gas sales......................................... $ 997 $ 1,012 $ 250 $ 263
Direct operating expenses......................................... 225 220 46 57
--------- --------- --------- ----------
Excess of revenues over direct operating expenses................. $ 772 $ 792 $ 204 $ 206
========= ========= ========= ==========
</TABLE>
See accompanying notes to statements of operating revenues and direct
operating expenses.
F-47
<PAGE> 115
DAWSON COUNTY PROPERTIES
NOTES TO STATEMENTS OF OPERATING REVENUES
AND DIRECT OPERATING EXPENSES
1. Basis of Presentation
On June 30, 1998, EXCO completed the acquisition of certain oil and natural gas
properties from J.M. Hill, J.M. Hill, Trustee, Walter O. Hill, Steven J. Devos,
Bart Humphrey and other working interest owners in Dawson and Brazos Counties,
Texas (the "Dawson County Properties"). The Dawson County Properties include 11
gross (5.3 net) producing wells and 4 gross (1.5 net) saltwater disposal and
non-producing wells which may require recompletions, workovers or abandonment.
The Dawson County Properties include 645 gross (327 net) developed acres and 627
gross (279 net) undeveloped acres. The purchase price was approximately $3.5
million cash.
The acquisition has been funded through borrowings made under EXCO's credit
facility with NationsBank, and cash from working capital.
The accompanying financial statements present the operating revenues and direct
operating expenses of the Dawson County Properties. The operating revenues and
direct operating expenses presented herein relate only to the interests in the
producing oil and natural gas properties to be acquired and do not represent all
of the oil and natural gas operations of the sellers. Direct operating expenses
include the actual costs of maintaining the producing properties and their
production, but do not include charges for depletion, depreciation, and
amortization; federal and state income taxes; interest; or general and
administrative expenses. Presentation of complete historical financial
statements for the years ended December 31, 1996 and 1997 is not practicable
because the Dawson County Properties were not accounted for as a separate
entity; and therefore, such statements are not available. The operating revenues
and direct operating expenses for the periods presented may not be
representative of future operations.
Revenues in the accompanying statements of operating revenues and direct
operating expenses are recognized on the sales method. Direct operating expenses
are recognized on an accrual basis.
In management's opinion, the accompanying interim financial statements contain
all adjustments (consisting solely of normal recurring accruals) necessary to
present fairly the financial position of Dawson County Properties as of March
31, 1998, the results of operations for the three month periods ended March 31,
1997 and 1998, and the cash flows for the three month periods ended March 31,
1997 and 1998.
The results of operations for the three months ended March 31, 1998, are not
necessarily indicative of the results expected for the full year.
2. Supplemental Oil and Natural Gas Reserve and Standardized Measure
Information (Unaudited)
Reserve Quantity Information
The following table presents EXCO's estimate of the proved oil and natural gas
reserves of the Dawson County Properties, all of which are located in the United
States, as of December 31, 1997. EXCO emphasizes that reserve estimates are
inherently imprecise and that estimates of new discoveries are more imprecise
than those of producing oil and natural gas properties. Accordingly, the
estimates are expected to change as future information becomes available. The
estimates have been prepared by independent petroleum reservoir engineers.
<TABLE>
Oil (Bbls) Gas (Mcf) Boe*
---------------- ---------------- ---------------
<S> <C> <C> <C>
Proved reserves................................... 482,300 242,400 522,700
================= ================ ===============
Proved developed reserves......................... 482,300 242,400 522,700
================= ================ ===============
</TABLE>
* Boe - Barrels of oil equivalent calculated by converting 6 Mcf of natural gas
to 1 Bbl of oil.
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves
F-48
<PAGE> 116
DAWSON COUNTY PROPERTIES
NOTES TO STATEMENTS OF OPERATING REVENUES
AND DIRECT OPERATING EXPENSES
The Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil and Gas Reserves ("Standardized Measure") is a disclosure requirement under
Statement of Financial Accounting Standards No. 69.
The Standardized Measure does not purport to be, nor should it be interpreted to
present, the fair value of the oil and natural gas reserves of the Dawson County
Properties. An estimate of fair value would also take into account, among other
things, the recovery of reserves not presently classified as proved, the value
of unproved properties, and consideration of expected future economic and
operating conditions.
Under the Standardized Measure, future cash flows are estimated by applying
year-end prices, adjusted for fixed and determinable escalations, to the
estimated future production of year-end proved reserves. Future cash flows are
reduced by estimated future production costs, based on period-end costs, and
projected future development costs to determine net cash inflows. The Dawson
County Properties are not a separate tax paying entity. Accordingly, the
Standardized Measure for the Dawson County Properties is presented before
deduction of income taxes. Future net cash flows are discounted using a 10%
annual discount rate to arrive at the Standardized Measure.
The Standardized Measure of discounted future net cash flows relating to proved
oil and natural gas reserves of the Dawson County Properties at December 31,
1997 follows (in thousands):
<TABLE>
<S> <C>
Future cash inflows................................................................................ $ 8,673
Future production costs............................................................................ (2,394)
Discount of future net cash flows at 10% per annum................................................. (1,811)
-----------
Discounted future net cash flows before income taxes............................................... $ 4,468
===========
</TABLE>
Estimates of economically recoverable oil and natural gas reserves and of future
net revenues are based upon a number of variable factors and assumptions, all of
which are to some degree speculative and may vary considerably from actual
results. Therefore, actual production, revenues, taxes, development and
operating expenditures may not occur as estimated. The reserve data are
estimates only, are subject to many uncertainties and are based on data gained
from production histories and on assumptions as to geologic formations and other
matters. Actual quantities of natural gas and oil may differ materially from the
amounts estimated.
During 1996 and 1997 the Dawson County Properties incurred no developmental
or exploratory costs and there were no incremental general and administrative
costs.
The weighted average prices of oil and natural gas at December 31, 1997 used in
the calculation of the Standardized Measure were $17.04 per barrel and $1.87 per
Mcf, respectively.
F-49
<PAGE> 117
================================================================================
No dealer, salesperson or other individual has been
authorized to give any information or to make any
representations other than those contained in this Prospectus,
in connection with this offering covered by this Prospectus.
If given or made, such information or representations must
not be relied upon as having been authorized by EXCO or
any agent or underwriter. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy,
Rights or Common Stock in any jurisdiction
where, or to any person to whom, it is unlawful to make such
offer or solicitation. Neither the delivery of this Prospectus
nor any sale made hereunder shall, under any circumstances,
create any implication that there has been no change in the
facts set forth in this Prospectus or in the affairs of EXCO
since the date hereof.
-----------------------
TABLE OF CONTENTS
Page
<TABLE>
<S> <C>
Disclosure Regarding Forward-looking Statements.................. 1
Prospectus Summary............................................... 2
The Company...................................................... 2
Risk Factors.................................................... 14
Recent Developments............................................. 21
Use of Proceeds................................................. 24
Capitalization.................................................. 25
Dilution........................................................ 25
Price Range of Common Stock and Dividend Policy................. 26
The Rights Offering............................................. 28
Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................35
Business and Properties......................................... 40
Description of Capital Stock.................................... 55
Selling Shareholders............................................ 57
Plan of Distribution.............................................58
Material Federal Income Tax Considerations.......................59
Legal Matters................................................... 61
Experts......................................................... 61
Additional Information.......................................... 62
Incorporation of Certain Documents by Reference................. 63
Glossary of Selected Oil and Natural Gas Terms.................. 64
EXCO Resources, Inc. Financial Statements.......................F-1
</TABLE>
================================================================================
================================================================================
5,943,360 Shares
[Logo]
EXCO Resources, Inc.
Rights to
Purchase Shares of
Common Stock
and Shares of
Common Stock
----------------------
PROSPECTUS
----------------------
================================================================================
<PAGE> 118
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. Other Expenses of Issuance and Distribution.
The following is an itemization of all expenses (subject to future
contingencies) incurred or to be incurred by the Registrant in connection with
the issuance and distribution of the securities being offered. All items below
are estimates other than the Securities and Exchange Commission (the
"Commission") fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee $ 10,866
Printing and engraving expenses.................... 25,000
Accounting fees and expenses....................... 35,000
Engineer fees and expenses......................... 5,000
Blue Sky fees and expenses......................... 25,000
Legal fees and expenses............................ 75,000
Subscription Agent fees and expenses............... 12,000
Miscellaneous...................................... 4,694
------------
Total.......... $ 192,500
</TABLE>
ITEM 15. Indemnification of Directors and Officers.
EXCO has authority under Articles 2.02(A)(16) and 2.02-1 of the Texas
Business Corporation Act to indemnify its officers and directors to the extent
provided for in such statute.
Article VI of EXCO's Restated Bylaws provides that EXCO shall indemnify
each of its directors and officers, its former directors and officers and agents
of EXCO against expenses actually and reasonably incurred by him or her in
connection with the defense of any action, suit or proceeding, civil or
criminal, in which such person is made a party by reason of being or having been
such director or officer, except in situations where he or she shall be adjudged
in such action, suit or proceeding to be liable for negligence or misconduct in
the performance of his or her duty to EXCO. In the event of a criminal
conviction (whether based on a plea of guilty or nolo contendere or its
equivalent, or after trial), such conviction shall not be deemed an adjudication
of liability for negligence or misconduct in the performance of duty to EXCO if
such director or officer acted in good faith in what he or she considered to be
the best interest of EXCO and without reasonable cause to believe that his or
her actions were illegal. In absence of an adjudication which expressly absolves
the director or officer of liability to EXCO or its shareholders for negligence
or misconduct, or in the event of a settlement, the right to indemnification of
a director or officer shall be conditioned upon prior resolution adopted by
two-thirds of the disinterested members of the Board or by independent counsel.
EXCO intends to maintain insurance against any liability incurred by
its officers and directors in defense of any actions to which they are made
parties by reason of their positions as officers and directors.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions, the Registrant has been
informed that in the opinion of the Commission such indemnification is against
public policy as expressed in the Act and is therefore unenforceable.
II-1
<PAGE> 119
ITEM 16. Exhibits and Financial Statement Schedules.
Exhibits. The exhibits listed below are filed as part of or
incorporated by reference in this Registration Statement. Where such filing is
made by incorporation by reference to a previously filed report, such report is
identified in parentheses. See the Index of Exhibits included with the exhibits
filed as part of this Registration Statement.
<TABLE>
Number Description
- --------------- -------------------------------------------------------------
<S> <C>
2.1 Stock Option Agreement dated May 1, 1998, among EXCO
Resources, Inc., on the one hand, and Mr. E.B. Brooks, Jr.,
on the other, incorporated by reference from the Schedule
13D dated May 8, 1998, filed by EXCO in respect of EXCO's
acquisition of beneficial ownership of shares of common
stock of Gladstone Resources, Inc.
2.2 Shareholder Agreement dated May 1, 1998, among EXCO
Resources, Inc., on the one hand, and Ms. Rebecca B. Feldt,
on the other, incorporated by reference from the Schedule
13D dated May 8, 1998, filed by EXCO in respect of EXCO's
acquisition of beneficial ownership of shares of common
stock of Gladstone Resources, Inc.
2.3 Shareholder Agreement dated May 1, 1998, among EXCO
Resources, Inc., on the one hand, and Ms. Carol Brady, on
the other, incorporated by reference from the Schedule 13D
dated May 8, 1998, filed by EXCO in respect of EXCO's
acquisition of beneficial ownership of shares of common
stock of Gladstone Resources, Inc.
2.4 Shareholder Agreement dated May 1, 1998, among EXCO
Resources, Inc., on the one hand, and Ms. Deborah Brooks
Garrett, on the other, incorporated by reference from the
Schedule 13D dated May 8, 1998, filed by EXCO in respect of
EXCO's acquisition of beneficial ownership of shares of
Common Stock of Gladstone Resources, Inc.
2.5 Agreement and Plan of Merger dated May 1, 1998, between
EXCO Resources, Inc., and Gladstone Resources, Inc.,
incorporated by reference from the Schedule 13D dated May
8, 1998, filed by EXCO in respect of EXCO's acquisition of
beneficial ownership of shares of Common Stock of
Gladstone Resources, Inc.
4.1** Restated Articles of Incorporation of EXCO, as amended
4.2** Restated Bylaws of EXCO, as amended
4.3** Specimen Stock Certificate for the Common Stock of EXCO
4.4** Form of Letter to Stockholders
4.5** Form of Subscription Certificate
4.6** Form of Instruction as to Use of Subscription Certificates
4.7** Form of Letter to Brokers
4.8** Form of Letter to Clients
4.9** Form of Notice of Guaranteed Delivery
4.10** Form of Guidelines to Form W-9
4.11** Form of DTC Participant Oversubscription Exercise Form
4.12** Form of Nominee Holder Certificate
5.1** Opinion of Haynes and Boone LLP (including the consent of
such firm) regarding the legality
of securities being offered
8.1* Form of Opinion of Haynes and Boone, LLP (including the
consent of such firm) as to certain tax matters
10.1** Form of Standby Purchase Commitment between EXCO Resources,
Inc. on the one hand and Ares Management, L.P. on behalf of
Ares Leveraged Investment Fund on the other hand dated
__, 1998.
10.2 Credit Agreement among EXCO Resources, Inc., as borrower,
and NationsBank of Texas, N.A., as agent, and financial
institutions listed on Schedule I, dated February 11, 1998
filed as an Exhibit to EXCO's Form 8-K dated February 25,
1998 and incorporated by reference herein
10.3 Purchase and Sale Agreement among EXCO Resources, Inc. and
Osborne Oil Company, et al., dated January 27, 1998 filed
as an Exhibit to EXCO's Form 8-K dated February 25, 1998
and incorporated by reference herein
10.4 Stock Purchase Agreement between EXCO Resources, Inc. and
Jacobi-Johnson Energy, Inc., dated May 1, 1998, filed as
Exhibit 4.1 to EXCO's Current Report on Form 8-K dated May
1, 1998 and incorporated by reference herein.
10.5 EXCO Resources, Inc. 1998 Stock Option Plan, filed as
Appendix A to EXCO's Proxy Statement dated March 17, 1998
and incorporated by reference herein.
10.6* Form of Standby Purchase Commitment between EXCO
Resources, Inc. on the one hand and Oaktree Capital
Management, LLC on the other hand dated ________, 1998.
23.1** Consent of Haynes and Boone LLP (included as part of its
opinions to be filed as Exhibits 5.1 and 8.1)
23.2* Consent of Belew Averitt LLP, independent auditors
23.3* Consent of Ernst & Young LLP, independent auditors
23.4* Consent of Harold L. Ratcliff, C.P.A.
23.5** Consent of Milmac Operating Company, independent petroleum
engineers
23.6* Consent of Lee Keeling and Associates, Inc., independent
petroleum engineers
25.1** Power of Attorney of officers and directors of EXCO
(included on signature page previously filed)
27.1** Financial Data Schedule
</TABLE>
-----------------------
* Filed herewith.
** Previously Filed.
Financial Statement Schedules
All schedules and historical financial information are omitted because
they are not applicable or the required information is shown in the financial
statements or notes thereto.
ITEM 17. Undertakings.
1. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Registrant's Restated Articles of Incorporation or
otherwise, the Registrant has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that
II-2
<PAGE> 120
a claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
2. The undersigned registrant hereby undertakes that:
To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective Registration Statement;
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the Registration
Statement;
provided, however, that paragraphs (i) and (ii) will not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Exchange Act that are incorporated by
reference in this Registration Statement.
For the purpose of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
It will remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
For purposes of determining any liability under the Securities Act, each
filing of the registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Exchange Act (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that
is incorporated by reference in the Registration Statement shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-3
<PAGE> 121
3. The undersigned registrant hereby undertakes to supplement the
prospectus, after the expiration of the subscription period, to set forth the
results of the subscription offer, the transactions by the underwriters during
the subscription period, the amount of unsubscribed securities to be purchased
by the underwriters, and the terms of any subsequent reoffering thereof. If any
public offering by the underwriters is to be made on terms differing from those
set forth on the cover page of the prospectus, a post-effective amendment will
be filed to set forth the terms of such offering.
II-4
<PAGE> 122
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on July 1, 1998.
EXCO RESOURCES, INC.
By: /s/ DOUGLAS H. MILLER
-------------------------------------
Douglas H. Miller
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on July
1, 1998.
<TABLE>
<S> <C>
/s/ DOUGLAS H. MILLER Chairman, Chief Executive Officer
-------------------------------
Douglas H. Miller
/s/ T.W. EUBANK President, Treasurer, Director
-------------------------------
T.W. Eubank
/s/ J. DOUGLAS RAMSEY Chief Financial Officer, Vice President, Director
------------------------------- (Principal Financial and Accounting Officer)
J. Douglas Ramsey
T. BOONE PICKENS* Director
-------------------------------
T. Boone Pickens
STEPHEN F. SMITH* Director
-------------------------------
Stephen F. Smith
EARL E. ELLIS* Director
-------------------------------
Earl E. Ellis
J. MICHAEL MUCKLEROY* Director
-------------------------------
J. Michael Muckleroy
</TABLE>
II-5
<PAGE> 123
Douglas H. Miller, by signing his name hereto, does sign and execute
this Pre-Effective Amendment No. 2 on Form S-2 to its Registration Statement on
behalf of each of the above-named officers and directors of the Registrant on
this 1st day of July, 1998, pursuant to powers of attorneys executed on behalf
of each of such officers and directors, and previously filed with the
Commission.
*By: /s/ DOUGLAS H. MILLER
-----------------------------------
Douglas H. Miller
Attorney-in-Fact
II-6
<PAGE> 124
INDEX TO EXHIBITS
<TABLE>
Number Description
- --------------- -------------------------------------------------------------
<S> <C>
2.1 Stock Option Agreement dated May 1, 1998, among EXCO
Resources, Inc., on the one hand, and Mr. E.B. Brooks, Jr.,
on the other, incorporated by reference from the Schedule
13D dated May 8, 1998, filed by EXCO in respect of EXCO's
acquisition of beneficial ownership of shares of common
stock of Gladstone Resources, Inc.
2.2 Shareholder Agreement dated May 1, 1998, among EXCO
Resources, Inc., on the one hand, and Ms. Rebecca B. Feldt,
on the other, incorporated by reference from the Schedule
13D dated May 8, 1998, filed by EXCO in respect of EXCO's
acquisition of beneficial ownership of shares of common
stock of Gladstone Resources, Inc.
2.3 Shareholder Agreement dated May 1, 1998, among EXCO
Resources, Inc., on the one hand, and Ms. Carol Brady, on
the other, incorporated by reference from the Schedule 13D
dated May 8, 1998, filed by EXCO in respect of EXCO's
acquisition of beneficial ownership of shares of common
stock of Gladstone Resources, Inc.
2.4 Shareholder Agreement dated May 1, 1998, among EXCO
Resources, Inc., on the one hand, and Ms. Deborah Brooks
Garrett, on the other, incorporated by reference from the
Schedule 13D dated May 8, 1998, filed by EXCO in respect of
EXCO's acquisition of beneficial ownership of shares of
Common Stock of Gladstone Resources, Inc.
2.5 Agreement and Plan of Merger dated May 1, 1998, between
EXCO Resources, Inc., and Gladstone Resources, Inc.,
incorporated by reference from the Schedule 13D dated May
8, 1998, filed by EXCO in respect of EXCO's acquisition of
beneficial ownership of shares of Common Stock of
Gladstone Resources, Inc.
4.1** Restated Articles of Incorporation of EXCO, as amended
4.2** Restated Bylaws of EXCO, as amended
4.3** Specimen Stock Certificate for the Common Stock of EXCO
4.4** Form of Letter to Stockholders
4.5** Form of Subscription Certificate
4.6** Form of Instruction as to Use of Subscription Certificates
4.7** Form of Letter to Brokers
4.8** Form of Letter to Clients
4.9** Form of Notice of Guaranteed Delivery
4.10** Form of Guidelines to Form W-9
4.11** Form of DTC Participant Oversubscription Exercise Form
4.12** Form of Nominee Holder Certificate
5.1** Opinion of Haynes and Boone LLP (including the consent of
such firm) regarding the legality
of securities being offered
8.1* Form of Opinion of Haynes and Boone, LLP (including the
consent of such firm) as to certain tax matters
10.1** Form of Standby Purchase Commitment between EXCO Resources,
Inc. on the one hand and Ares Management, L.P. on behalf of
Ares Leveraged Investment Fund on the other hand dated
__, 1998.
10.2 Credit Agreement among EXCO Resources, Inc., as borrower,
and NationsBank of Texas, N.A., as agent, and financial
institutions listed on Schedule I, dated February 11, 1998
filed as an Exhibit to EXCO's Form 8-K dated February 25,
1998 and incorporated by reference herein
10.3 Purchase and Sale Agreement among EXCO Resources, Inc. and
Osborne Oil Company, et al., dated January 27, 1998 filed
as an Exhibit to EXCO's Form 8-K dated February 25, 1998
and incorporated by reference herein
10.4 Stock Purchase Agreement between EXCO Resources, Inc. and
Jacobi-Johnson Energy, Inc., dated May 1, 1998, filed as
Exhibit 4.1 to EXCO's Current Report on Form 8-K dated May
1, 1998 and incorporated by reference herein.
10.5 EXCO Resources, Inc. 1998 Stock Option Plan, filed as
Appendix A to EXCO's Proxy Statement dated March 17, 1998
and incorporated by reference herein.
10.6* Form of Standby Purchase Commitment between EXCO
Resources, Inc. on the one hand and Oaktree Capital
Management, LLC on the other hand dated ________, 1998.
23.1** Consent of Haynes and Boone LLP (included as part of its
opinions to be filed as Exhibits 5.1 and 8.1)
23.2* Consent of Belew Averitt LLP, independent auditors
23.3* Consent of Ernst & Young LLP, independent auditors
23.4* Consent of Harold L. Ratcliff, C.P.A.
23.5** Consent of Milmac Operating Company, independent petroleum
engineers
23.6* Consent of Lee Keeling and Associates, Inc., independent
petroleum engineers
25.1** Power of Attorney of officers and directors of EXCO
(included on signature page previously filed)
27.1** Financial Data Schedule
</TABLE>
-----------------------
* Filed herewith.
** Previously Filed.
<PAGE> 1
EXHIBIT 8.1
[FORM OF HAYNES AND BOONE, LLP'S TAX OPINION]
July ___, 1998
EXCO Resources, Inc.
5735 Pineland Drive, Suite 235
Dallas, Texas 75231
Re: Distribution by EXCO Resources, Inc. of Rights to Purchase Common Stock
Ladies and Gentlemen:
We have acted as counsel to EXCO Resources, Inc. (the "Company") in connection
with the distribution to holders of its common stock (the "Existing
Shareholders") of rights to purchase common stock, par value $.02 per share (the
"Rights"), of the Company (the "Rights Offering").
You have requested our opinion as to the material United States federal income
tax consequences of the Rights Offering. In preparing our opinion, we have
reviewed and relied upon the Company's Registration Statement on Form S-3 as
amended on Form S-2, filed with the Securities and Exchange Commission on July
___, 1998 (other than the disclosure described in the Section titled "Material
Federal Income Tax Considerations" of such Registration Statement) (the
"Registration Statement"), and such other documents as we deemed necessary.
On the basis of the foregoing, it is our opinion that the distribution of the
Rights to the Existing Shareholders should not be a taxable transaction,
although the matter is not free from doubt.
The opinion set forth above is based upon the applicable provisions of the
Internal Revenue Code of 1986, as amended, the Treasury Regulations promulgated
or proposed thereunder, current positions of the Internal Revenue Service (the
"IRS") contained in published revenue rulings, revenue procedures, and
announcements, existing judicial decisions, and other applicable authorities. No
tax rulings have been or will be sought from the IRS with respect to any of the
matters discussed herein. Unlike a ruling from the IRS, opinions of counsel are
not binding on the IRS. Hence, no assurance can be given that the opinion stated
in this letter will not be successfully challenged by the IRS. We express no
opinion concerning any United States federal income tax consequences of the
Rights Offering except as expressly set forth above.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm and the summarization
of this opinion under the section titled "Certain Federal Income Tax
Considerations" in the Registration Statement.
Very truly yours,
Haynes and Boone, LLP
<PAGE> 1
EXHIBIT 10.6
June ___, 1998
OCM Principal Opportunities Fund, L.P.
c/o Oaktree Capital Management, LLC
550 South Hope Street
Suite 2200
Los Angeles, California 90071
Re: Standby Purchase Commitment
Gentlemen:
EXCO Resources, Inc., a Texas corporation (the "COMPANY"), hereby
confirms its agreement with Oaktree Capital Management, LLC, on behalf of OCM
Principal Opportunities Fund, L.P. (the "PURCHASER") as follows:
1.ab Offering of Rights to Purchase Common Stock. As described in that
certain Prospectus (herein so called) of the Company, dated June __, 1998, the
Company distributed (the "RIGHTS OFFERING") to all of its recordholders of
Common Stock, par value $0.02 per share (the "COMMON STOCK"), the right (each a
"RIGHT" and collectively, the "RIGHTS") to purchase authorized but unissued
shares of Common Stock at an exercise price of $____ per share (the "EXERCISE
PRICE"). The shares of Common Stock which are issuable upon exercise of the
Rights are herein called the "RIGHTS SHARES." All unexercised Rights will expire
at the close of business 45 days after the effective date of the Rights Offering
(the "EXPIRATION DATE").
One of the components of the Rights Offering is a standby commitment
(the "STANDBY COMMITMENT") to exercise any Rights which have not been exercised
at or prior to the close of business on the Expiration Date. By agreement dated
June ___, 1998 (the "STANDBY AGREEMENT"), Ares Management, L.P., on behalf of
Ares Leveraged Investment Fund, L.P. ("ARES") agreed to assume the Standby
Commitment for a minimum of one million (1,000,000) shares and a maximum of two
million (2,000,000) shares. It is anticipated that there will be additional
unexercised Rights which Purchaser desires to acquire and exercise pursuant to
the Standby Commitment. Subject to the terms and conditions hereinafter set
forth, Purchaser hereby assumes a portion of the Standby Commitment and agrees
to exercise one million (1,000,000) Rights which would otherwise expire
unexercised on the Expiration Date at a price equal to the Exercise Price. The
shares of Common Stock purchased pursuant to this Agreement are hereinafter
referred to as the "OCM STANDBY SHARES."
<PAGE> 2
2. Representations and Warranties of the Company. The Company
represents, warrants and agrees that:
(a) The Company is subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT"), and in accordance therewith has timely filed documents (the
"EXCHANGE ACT DOCUMENTS") with the Securities and Exchange Commission
(the "COMMISSION") since December 1, 1997. At the time such Exchange
Act Documents were filed with the Commission, they complied in all
material respects with the requirements of the Exchange Act and the
rules and regulations of the Commission thereunder (the "RULES AND
REGULATIONS"), and did not include an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and any
Exchange Act Documents hereafter filed will, when they are filed with
the Commission, comply in all material respects with the requirements
of the Exchange Act and the Rules and Regulations, and will not include
an untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading.
(b) Since the date of the Company's most recent Exchange Act
Document, there is no material fact, circumstance or event with respect
to the Company or any of its subsidiaries that has had or may be
expected to have a material adverse effect on the business, properties,
condition (financial or other) or results of operations of the Company
and its subsidiaries taken as a whole.
(c) The issued and outstanding shares of Common Stock of the
Company and the shares of Common Stock issuable upon exercise of the
Rights have been duly authorized. The issued and outstanding shares of
Common Stock of the Company are validly issued and outstanding, fully
paid and non-assessable, with no personal liability attaching to the
ownership thereof. There are no issued or outstanding shares of
Preferred Stock, par value $0.01 per share, of the Company. There is
not any preemptive or other right to subscribe for or to purchase, or
any lien, charge, encumbrance, restriction on voting or transfer of, or
any other claim of any third party on, any issued and outstanding
shares of Common Stock or the Rights Shares, pursuant to the Company's
corporate charter or by-laws or any agreement or other instrument to
which the Company is a party or by which the Company may be bound. The
capitalization of the Company as of the date hereof and the anticipated
capitalization of the Company after the completion of the Rights
Offering are set forth in the Capitalization section of the Prospectus.
(d) The OCM Standby Shares will, when issued and sold to the
Purchaser as contemplated hereby, be validly authorized, issued and
outstanding, fully paid and non-assessable with no personal liability
attaching to the ownership thereof and will conform to the description
of the Common Stock contained in the Exchange Act Documents.
(e) Each Right is convertible into one share of Common Stock.
2
<PAGE> 3
(f) As of the close of business on the second business day
preceding the date hereof, there were 594,336 shares of Common Stock
outstanding; the exercise of all the Rights has been duly authorized by
the Company.
(g) This Agreement has been duly authorized, executed and
delivered by the Company, constitutes the valid and binding agreement
of the Company and is enforceable against the Company in accordance
with its terms. No further approval or authorization of the
shareholders or the Board of Directors of the Company or any other
entity will be required for the issuance and sale of Common Stock
referred to in subparagraph (d) above. Neither such issuance nor the
consummation of any other transactions herein contemplated will result
in a breach by the Company of any terms of, or constitute a default
under, any other agreement or undertaking of the Company, which breach
or default might be expected to have a material adverse effect on such
Common Stock, the Company or the transactions contemplated herein.
Other than as contemplated herein, no person has the right to require
the Company or any subsidiary of the Company to register any capital
stock for offering and sale under the Securities Act of 1933, as
amended (the "SECURITIES ACT").
(h) The Company and its subsidiary each have been duly
incorporated and each is a validly existing corporation in good
standing under the laws of its jurisdiction of incorporation and is
duly qualified and in good standing in each jurisdiction in which its
ownership of property or the conduct of its business requires such
qualification (except where the failure to so qualify would not have a
material adverse effect upon the Company and its subsidiary taken as a
whole). The Company and its subsidiary each have the corporate power
and authority and holds all valid permits and other required
authorizations from governmental authorities necessary to carry on
business as now conducted and as to be conducted on the Delivery Date
(as hereinafter defined) except such permits and authorizations that
are not singly or in the aggregate, material to the Company and its
subsidiary taken as a whole; neither entity has received any notice
relating to the revocation or modification of any such permits or
authorizations that are singly or in the aggregate material to the
Company and its subsidiary taken as a whole.
(i) Except as described in the Exchange Act Documents, there
is no action, suit or proceeding pending before any court, arbitrator
or governmental body, nor, to the knowledge of the Company, is any such
action threatened, which (i) might affect the consummation of the
transactions contemplated by this Agreement, (ii) is required to be
disclosed under the Exchange Act or the Rules and Regulations or, in
the case of any threatened action, would be required to be so disclosed
if such action were pending or (iii) would be likely to result in any
material adverse change in the financial position, results of
operations or business of the Company and its subsidiaries taken as a
whole.
3. Representations and Warranties of Purchaser. The Purchaser
represents and warrants that it is purchasing the OCM Standby Shares for its own
account and not with any intention of selling or transferring the OCM Standby
Shares in violation of the Securities Act,
3
<PAGE> 4
subject, nevertheless, to the understanding that the disposition of Purchaser's
property shall at all times be and remain within Purchaser's control.
4. Purchase, Delivery and Payment of Conversion Shares. Purchaser
agrees to purchase from the Company the OCM Standby Shares at a purchase price
equal to the aggregate applicable Exercise Price of the OCM Standby Shares.
Delivery and payment of the OCM Standby Shares shall be made at the
offices of Haynes and Boone, LLP, 901 Main Street, Suite 3100, Dallas, Texas, at
9:00 a.m., Dallas time, on ______________, 1998, or on such later date (but not
later than three business days after the Expiration Date) as may be specified by
written notice from the Purchaser to the Company given not more than two
business days prior to the Expiration Date (such delivery and payment date being
the "DELIVERY DATE"). The date and time for such delivery and payment are herein
sometimes referred to as the Delivery Date. On the Delivery Date, the Company
shall deliver to the Purchaser certificates for the OCM Standby Shares against
payment of the purchase price therefor by wire transfer to an account designated
by the Company to the Purchaser at least one business day prior to the Delivery
Date. Such certificates shall be registered in such name or names and in such
number of shares of Common Stock as the Purchaser shall request in writing not
less than two full business days prior to the Delivery Date. For purposes of
expediting the checking and packaging of the certificates to be so delivered,
the Company shall make such certificates available for inspection by the
Purchaser in Dallas, Texas, not later than 5:00 p.m., Dallas time, on the
business day prior to the Delivery Date.
5. Further Agreements of the Company. The Company agrees:
(a) To timely file all documents, and any amendments of previously
filed documents, required to be filed by it pursuant to Section 13, 14
or 15(d) of the Exchange Act;
(b) To direct the Transfer Agent to advise you daily of the number
of Rights exercised for Common Stock on the preceding day;
(c) To take no action the effect of which would be to require an
adjustment in the Exercise Price of the shares of Common Stock from the
present price set above; and
(d) As soon as practicable after the completion of the Rights
Offering and Purchaser's purchase of the OCM Standby Shares pursuant to
this Agreement, the Company will take all necessary actions (including
solicitation of consent from shareholders, if necessary) to increase
the number of directors of the Company's Board of Directors such that
the Purchaser may designate one additional director to serve on the
Board (the "PURCHASER'S DESIGNEE"), which designation shall be
reasonably acceptable to the Company. As long as the Purchaser owns at
least ten percent (10%) of the Company's issued and outstanding Common
Stock, the Purchaser shall have the right to nominate the Purchaser's
Designee to the Company's Board of Directors.
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<PAGE> 5
6. Conditions of the Purchaser's Obligations. The obligations of the
Purchaser hereunder are subject to the accuracy in all material respects, when
made and on the Delivery Date, of the representations and warranties of the
Company contained herein, to performance by the Company of its obligations
hereunder and to each of the following additional terms and conditions:
(a) The legality and sufficiency of the exercise of the Rights for
shares of Common Stock, the validity and form of the certificates
representing the Common Stock deliverable to the Purchaser hereunder,
all corporate proceedings and other legal matters incident to the
foregoing and to the authorization, form and validity of this Agreement
and all other legal matters relating to this Agreement and the
transactions contemplated hereby shall be reasonably satisfactory in
all material respects to the Purchaser and its counsel and the Company
shall have furnished to such counsel all documents and information that
such counsel shall reasonably request to enable them to pass upon such
matters.
(b) The number of unexercised Rights which are subject to this
Agreement shall be no less than one million (1,000,000) shares.
(c) The Company shall have furnished such additional documents and
certificates as the Purchaser or its counsel may reasonably request.
(d) The Purchaser shall have no obligation to purchase any OCM
Standby Shares unless and until:
i. Douglas H. Miller purchases a minimum of 250,000 shares
pursuant to the Rights he receives in the Rights Offering;
ii. At least two million (2,000,000) shares are purchased
pursuant to the Rights Offering (inclusive of shares
purchased by Douglas H. Miller, but exclusive of shares
purchased by Ares); and
iii. Ares shall have purchased at least one million (1,000,000)
shares pursuant to the terms of the Standby Agreement and
any additional shares required to be purchased by Ares
thereunder.
(e) On the Delivery Date, the Company shall have furnished to the
Purchaser a certificate dated the Delivery Date, signed by the
Company's counsel, to the effect that the signer of such certificate
has examined the Exchange Act Documents and that, in his opinion, (i)
as of the date of the Exchange Act Documents, the statements made in
the Exchange Act Documents were true and correct, and none of the
Exchange Act Documents omits to state a material fact required to be
stated therein or necessary in
5
<PAGE> 6
order to make the statements therein not misleading in light of the
circumstances under which they were made, (ii) since the date of the
Exchange Act Documents no event has occurred which should have been set
forth in an amendment of or supplement to the Exchange Act Documents
but which has not been so set forth, (iii) neither the Company nor any
of its subsidiaries has any material contingent obligation which is not
disclosed in the Exchange Act Documents and (iv) the representations
and warranties of the Company herein are true and correct as of the
Delivery Date, the Company has complied with all its agreements
contained herein and the conditions on its part to be fulfilled set
forth herein have been fulfilled.
7. Notices. The Company shall be entitled to act and rely upon any
request, consent, notice or agreement given or made by the Purchaser. Any notice
to the Purchaser shall be sufficient if given in writing by telecopy, overnight
courier service or personal delivery addressed to Oaktree Capital Management,
LLC, on behalf of OCM Principal Opportunities Fund, L.P. (telecopy (213)
694-1593), attention of Vincent J. Cebula; and any notice to the Company shall
be sufficient if given in writing by telecopy, overnight courier service or
personal delivery addressed to the Company at EXCO Resources, Inc., 5735
Pineland Drive, Suite 235 (telecopy (214) 368-2087), attention of Douglas H.
Miller.
8. Effective Date of Termination. This Agreement may not be
terminated except by the written agreement of the Purchaser and the Company.
If the Company shall fail to deliver the OCM Standby Shares to
the Purchaser for any reason permitted under this Agreement or if the Purchaser
shall decline to purchase the OCM Standby Shares for any reason permitted under
this Agreement, the Company shall reimburse the Purchaser for the reasonable
fees and expenses of its counsel incurred in connection with this Agreement and
the proposed purchase of the OCM Standby Shares, and upon demand the Company
shall pay the full amount thereof to the Purchaser; provided, however, that if
this Agreement is terminated by notice from the Purchaser pursuant to the second
clause of the prior sentence, the Company shall not be obligated to reimburse
the Purchaser on account of these expenses. The Company shall not be liable to
the Purchaser under any circumstances for damages on account of the loss of
anticipated profits from the sale of OCM Standby Shares. In any event, the
Company shall pay its own expenses.
9. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the Purchaser, the Company and their
respective successors. This Agreement and the terms and provisions hereof are
for the sole benefit of only those persons, except that the representations,
warranties and agreements of the Company contained in this Agreement shall also
be deemed to be for the benefit of the person or persons, if any, who control
the Purchaser within the meaning of the Securities Act. Nothing in this
Agreement is intended or shall be construed to give any person other than the
persons mentioned in the preceding two sentences any legal or equitable right,
remedy or claim under or in respect of this Agreement or any provision contained
herein.
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<PAGE> 7
10. Certain Definitions. For purposes of this Agreement, (a)
"BUSINESS DAY" means any day on which the New York Stock Exchange is open for
trading and "CLOSE OF BUSINESS" means 5:00 p.m., Dallas time, and (b)
"SUBSIDIARY" has the meaning set forth in Rule 405 of the rules and regulations
promulgated under the Securities Act.
11. Governing Law; Counterparts. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. This
Agreement may be executed in one or more counterparts and, if executed in more
than one counterpart, the executed counterparts shall together constitute a
single instrument.
If the foregoing correctly sets forth the agreement between
the Company and the Purchaser, please indicate your acceptance in the space
provided for that purpose below.
Very truly yours,
EXCO RESOURCES, INC.
By:
------------------------------------
Douglas H. Miller
Chairman and Chief Executive Officer
Accepted and agreed to this ____
day of June, 1998.
OCM PRINCIPAL OPPORTUNITIES FUND, L.P.
By: OAKTREE CAPITAL MANAGEMENT, LLC
its General Partner
By:
--------------------------------------
Bruce Karth, President
By:
--------------------------------------
Vincent J. Cebula, Managing Director
7
<PAGE> 1
EXHIBIT 23.2
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 13, 1997, except Note 2, as to which the date is
February 11, 1998 and Note 10, second paragraph as to which the date is March
31, 1998, with respect to the financial statements of EXCO Resources, Inc. in
the Registration Statement (Pre-effective Amendment No. 2 to Form S-2) and
related Prospectus of EXCO Resources, Inc. for the registration of 5,943,360
shares of its common stock to be filed with the Securities and Exchange
Commission on July 2, 1998, and to the incorporation by reference therein of our
report dated March 13, 1997, except Note 2, as to which the date is February 1,
1998 and Note 10, second paragraph, as to which the date is March 31, 1998, with
respect to the financial statements of EXCO Resources, Inc. in its Annual Report
(Form 10-K) for the two years ended December 31, 1997 filed with the Securities
and Exchange Commission.
/s/ Belew Averitt LLP
Dallas, Texas
July 2, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated February 11, 1998 (except for the second paragraph of
Note 10 for which the date is March 31, 1998), with respect to the financial
statements of EXCO Resources, Inc., and to our report dated February 11, 1998,
with respect to the statements of operating revenues and direct operating
expenses of the Maverick County Properties, and to our report dated May 15,
1998, with respect to the financial statements of Jacobi-Johnson Energy, Inc.
and to our report dated June 30, 1998, with respect to the statements of
operating revenues and direct operating expenses of the Dawson County Properties
in the Registration Statement (Pre-effective Amendment No. 2 to Form S-2) and
related Prospectus of EXCO Resources, Inc., for the registration of 5,943,360
shares of its common stock to be filed with the Securities and Exchange
Commission on July 2, 1998, and to the incorporation by reference therein of our
reports dated February 11, 1998 (except for the second paragraph of Note 10 for
which the date is March 31, 1998), with respect to the financial statements of
EXCO Resources, Inc., to the incorporation by reference therein of our report
dated February 11, 1998, with respect to the statements of operating revenues
and direct operating expenses of the Maverick County Properties in EXCO
Resources, Inc.'s Annual Report (Form 10-K) for the two years ended December 31,
1997 filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Dallas, Texas
July 1, 1998
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
[HAROLD RATCLIFF LETTERHEAD]
I consent to the reference to me under the caption "Experts" in the
Registration Statement (Amendment No. 1 to Form S-3 on Form S-2) and related
Prospectus of EXCO Resources, Inc., for the registration of 5,943,360 shares of
its common stock and to the incorporation by reference therein of my report
dated March 25, 1998, with respect to the financial statements of Gladstone
Resources, Inc., included in its Annual Report (Form 10-K) for the year ended
December 31, 1997, filed with the Securities and Exchange Commission.
HAROLD L. RATCLIFF, C.P.A.
Dallas, Texas
June 29, 1998
<PAGE> 1
EXHIBIT 23.6
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to (i) use in the Prospectus (the "Prospectus")
constituting part of the Registration Statement on Form S-2 filed by EXCO
Resources, Inc., a Texas corporation (the "Company"), under the Securities Act
of 1933 (the "Act"), of information contained in our reserve report relating to
the oil and gas reserves and revenue, as of December 31, 1995, December 31, 1996
and December 31, 1997, of certain interests of the Company, and our reserve
reports relating to the oil and gas reserves and revenue as of December 31,
1997, of certain interests in Jacobi-Johnson Energy, Inc., the Maverick County
Properties, and the Dawson County Properties and the information derived from
such letters, (ii) all references to such report letters and/or to this firm in
such Prospectus, and further consent to our being named as an expert therein,
and (iii) the incorporation of this consent in any Registration Statement filed
for the same offering pursuant to Rule 462(b) under the Act.
LEE KEELING AND ASSOCIATES, INC.
By:/s/ KENNETH RENBERG
-------------------------------
Kenneth Renberg, Vice President
Tulsa, Oklahoma
July 2, 1998
